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S Corporation elected S corporation status beginning in 2010 and will have Subchapter C earnings and...

S Corporation elected S corporation status beginning in 2010 and will have Subchapter C earnings and profits at the close of the current taxable year. This year, S expects that its business operations and investments will produce the following tax results:

Gross income from operations - $75,000
Business deductions - $60,000
Tax-exempt interest - $23,000
Dividends - $12,000
Long-term capital gain from the sale of investment real property - $35,000

(a) Is S Corporation subject to the Section 1375 tax on passive investment income? If so, compute the amount of the tax.

(b) Same as (a), above, except that S receives an additional $5,000 of tax-exempt interest.

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Answer #1

(a) Gross receipts = $75,000 + $23,000 + $12,000 + $35,000 = $145,000

Passive income = $23,000 + 12,000 = $35,000

25% of gross receipts = $145,000 * 0.25 = $36,250

Since passive income is less than 25% of gross receipts, S Corporation is not subject to tax under section 1375.

(b) Gross receipts with additional income = $150,000

25% of gross receipts = $150,000 * 0.25 = $37,500

Passive income = $35,000 + $5,000 = $40,000

Now, passive income is more than 25% of new gross receipts, S Corportaion will be leable to pay tax under section 1375.

Additional tax will be paid on excess income = $40,000 - $37,500 = $2,500

Tax @ 35% = $2,500 * 0.35 = $875

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