Question

On January 2, Chaz transfers cash of $60,000 to a newly formed corporation for 100% of the stock. In its initial year, the corporation has net income of $15,000. The income is credited to its earnings and profits account. The corporation distributes $5,000 to Chaz.

If an amount is zero, enter "0".

a. How do Chaz and the corporation treat the $5,000 distribution?
Chaz has a taxable dividend  of $5000 and the corporation has a deduction of $0.

b. Assume instead that Chaz transfers to the corporation cash of $30,000 for stock and cash of $30,000 for a note of the same amount. The note is payable in equal annual installments of $3,000 and bears interest at the rate of 6%. No distributions are made during the year to Chaz. However, at the end of the year, the corporation pays an amount to meet the loan obligation (i.e., the annual $3,000 principal payment plus the interest due).

Determine the total amount of the payment and its tax treatment to Chaz and the corporation.

The corporate payment to Chaz totals $_________. Chaz has interest of $1800 and a note repayment of
$3000 of which $1800 is taxable to Chaz. The corporation has a deduction of $1800.

Answer 1

The corporate payment to Chaz totals $4800. (interest of $1800 + annual note repayment of $3000)

(in case of the part of cash contributed in the form of loan then interest paid on loan is tax deductible in the hands of corporation and interest received is taxable by Chaz).