CPA · Question 17 · Area II: Entity Tax Compliance
An S Corporation was formerly a C Corporation and has Accumulated Earnings and Profits (AEP) of $20,000. It has an Accumulated Adjustments Account (AAA) of $10,000. In Year 1, the S Corp distributes $40,000 cash to its sole shareholder. The shareholder's stock basis before the distribution is $50,000. What is the tax treatment of the distribution?
Answer options:
$40,000 tax-free return of capital.
$10,000 tax-free return of capital; $20,000 taxable dividend; $10,000 tax-free return of capital.
$30,000 tax-free return of capital; $10,000 capital gain.
$10,000 tax-free return of capital; $30,000 taxable dividend.
68 questions · hints · full answers · grading
Expert