Question

Sales Inc. was a regular C corporation with only 100 shares issued for many years. In 2015 they filed the necessary forms to become an S corporation as of January 1, 2016. At the time they had $500,000 of retained earnings. They had no cash because they had been using all the profit to pay down the mortgages. All shareholders meet the at-risk and active tests for all transactions. Tom bought his 50 shares for 50,000 when Sales was formed in 1996. Vic bought his 25 shares in 2011 for $200,000. Wes bought his 25 shares in 2014 for $350,000. In 2016 Sales made a profit of $900,000. They used the profit to purchase real estate. There were no distributions to shareholders. What will Tom, Vic and Wes report on their income tax returns for 2016?

Answer 1

The profit of the S corporations allocated to the shareholders and taxed at shareholders level. Tom, Vic & Wes are not getting any contribution from S corporation but even when they have to offer profits for tax, which is given below. Also S corporation can not keep retained earning and that is also taxable in hands of shareholders.

Profits = $ 900000

It will be distributed in their shareholding ratio which is 50%, 25% & 25% i.e $ 300000, $ 325000 & $475000 respectively after adding share in retained earning.

1. Tom's share= $ 450000 ($900000*50/100). Amount of profit offer for tax will be $150000.

2. Vic's share= $ 225000 ($ 900000*25/100). Nothing will be offered for tax as it is not exceeding to shareholder basis.

3.Wes's share= $ 225000 ($ 900000*25/100). Nothing will be offered for tax as it is not exceeding to shareholder basis.