ExpertHard1 markMultiple Choice
CPA · Question 65 · Area V: Entity Taxation
A taxpayer is a 50% shareholder in an S corporation. The corporation has $0 accumulated E&P. At the beginning of the year, the shareholder's stock basis was $10,000. The corporation reported $5,000 of ordinary income and distributed $20,000 cash to the shareholder. What is the shareholder's recognized gain?
A taxpayer is a 50% shareholder in an S corporation. The corporation has $0 accumulated E&P. At the beginning of the year, the shareholder's stock basis was $10,000. The corporation reported $5,000 of ordinary income and distributed $20,000 cash to the shareholder. What is the shareholder's recognized gain?
Answer options:
A.
$0
B.
$5,000
C.
$10,000
D.
$20,000
How to approach this question
S Corp Distribution: Tax-free to extent of Basis. Excess = Capital Gain.
Full Answer
B.$5,000✓ Correct
Basis is increased by the income share ($10,000 + $5,000 = $15,000). The distribution of $20,000 reduces basis to zero, and the excess $5,000 is treated as capital gain.
Common mistakes
Forgetting to increase basis by the income before calculating gain.
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