Corporation S is an S Corporation which elects S status effe

Corporation S is an S Corporation which elects S status effective January a of the tax year specified for the exam. Sole shareholder J has a basis of $400,000 in his stock. At the same time, S has $200,000 in accumulated earnings and profits. For the same tax year, S has the following items of income and expense:

Gross Business Income $250,000

Dividend income $150,000

Business expenses $100,000

Expenses related to Dividends $50,000

a. J has non-separately stated income of $150,000 and dividend income of $100,000

b. J has non-separately stated income of $150,000 and dividend income of $83,333.

c. Neither of the above.

please explain why you choose this answer. Thank you.

Solution

Option a.

Business expenses are deductible from gross business income, assuming they are not already deducted so Net Income from business is as follows

Gross Business Income - Business Expenses = 250000-100000 = 150000

No expenses are allowed to be deducted against the dividend income but not the business income. and hence

Net Dividend Income = Gross Dividend Income - Expenses related to divided = 150000-50000 = 100000

so the correct option is (a)