Jennifer is a 60% shareholder in Rho Corporation, a calendar year S Corporation.

Question

Jennifer is a 60% shareholder in Rho Corporation, a calendar year S Corporation. During the year, Rho Corporation had gross income of $550,000 and operating expenses of $380,000. In addition, the corporation sold land that had been held for investment purposes for a short-term capital gain of $30,000. During the year, Rho Corporation distributed $50,000 to Jennifer. With respect to this information, which of the following statements is correct? Select one:

a. Jennifer reports ordinary income of $120,000.

b. Jennifer reports ordinary income of $102,000 and a short-term capital gain of $18,000.

c. Rho Corporation will pay tax on taxable income of $200,000.

d. Jennifer reports ordinary income of $ 50,000.

Explanation / Answer

Ans is d. Jennifer reports ordinary income of $ 50,000.

($550,000-$380,000)+$30,000=$200, 0000.Short term capital gain will be treated as ordinary income of a company but it is an S corporation .S corporations do not pay any federal income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns.

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