Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The c

ID: 2671446 • Letter: M

Question

Mike and Nancy are equal shareholders in MN Corporation, an S corporation. The corporation, Mike and Nancy are calendar-year taxpayers. The corporation has been an S corporation during its entire existence and thus has no accumulated E&P. The Shareholders have no loans to the corporation. The corporation incurred the following items in the current year:

Sales: $300,000

Cost of goods sold 140,000 Dividends on corp. investments 10,000 Tax-exempt 3,000 Section 1245 gain (recapture) on 22,000 equiptment sale Section 1231 gain on equipt. sale 12,000 Long-term capital gain on stock sale 8,000 Long-term capital loss on stock sale 7,000 Short-term capital loss on stock sale 6,000 Depreciation 18,000 Salary to Nancy 20,000 Meals & entertainment expenses 7,800

Interest expense on loans allocable to: Business debt 32,000 Stock investments 6,400 Tax-exempt bonds 1,800 Principle payment on business loan 9,000 Charitable contributions 2,000 Distributions to shareholders 30,000 ($15,000 ea.)

a. Compute the S corporation's ordinary income and separately stated items. Then show Mikes's and Nancy's shares of the items.

Explanation / Answer

S corporation ordinary income:

Sales

300,000

Cost of goods sold) MINUS

( 140,000)

Gross profit

$160,000

Plus: Sec. 1245 gain

22,000

Depreciation

$18,000

Salary to Nancy

20,000

Business interest

32,000

Meals and entertainment

3,900

73,900

S corporation ordinary income

$108,100

Separately stated items:

Dividend income

10,000

Sec. 1231 gain

12,000

Net long-term capital gain ($8,000 - $7,000)

1,000

Tax-exempt interest income

3,000

Short-term capital loss

(6,000)

Investment interest expense

(6,400)

Charitable contributions

(2,000)

Nondeductible meals and entertainment (M&E)

(3,900)

Nondeductible interest on tax-exempt interest income

(1,800)

Mike and Nancy each -----------------one-half of S corporation ordinary income and one-half of each separately stated item.