Question

2. Smith Corp. has made S - election on the date of its incorporation in year 2012. For the year 2019, Smith has a gross receipt for the year totaling $350,000 of which $100,000 is passive investment income. Expenditures directly connected to the production of the passive income total $35,000. Calculate Smith Corp.’s passive investment income tax (assume the tax rate 21%). Please show all calculations.

3. Tami, a U.S. Citizen, is a sole shareholder of S corporation, named "Happiness". she has $5,000 basis in stock. Tami also loaned money to S Corporation and has basis of $3,000. Assume no AEP, calendar year and beginning balance of AAA and OAA accounts are zero. The Corp. made $10,000 in the ordinary income which was reported on Tami's K-1. Corp. also received a tax- free interest income of $4,000 which was also reported on K-1. Tami took a distribution of $21,000 during the year from the S corporation. Please calculate the year-end balances in AAA account, OAA Account, Tami's stock basis and loan basis showing the effects of the distribution. Please show all calculations.

4. Spencer purchased his partnership interest from John the first day of the current year for $40,000 cash. Michelle and Sue are other two partners in this business. Spencer received a $10,000 cash distribution from the partnership during the year, and his share of partnership income is $15,000. His share of partnership liabilities on the last day of the partnership year is $20,000. Spencer's outside basis for his partnership interest at the end of the year is $______. Please show all calculations.

Answer 1

2. Smith Corp has passive investment income of $100,000 which is more than 25% of the total gross receipts.

Smith Corp's passive investment income tax

Passive Investment income: 100,000

Less: Expenses directly connected to the production of passive income: $ 35,000

Net passive investment income taxable: $ 65,000

Income tax on net passive income @ 21%: $65,000 * 21% = $ 13,650

3.

Particulars	AAA	OAA	Loan Basis	Stock Basis
Opening Balance	-	-	3,000	5,000
Ordinary Income	10,000	-	-	-
Exempt interest income	-	4,000	-	-
Distribution	-10,000	-4,000	-3,000	-4,000
Closing Balance	-	-	-	1,000

Since no AEP, distributions will be made first from AAA account, then OAA account, then loan given by Tami can be withdrawn by him in form of distribution balance will be adjusted from stock.

4.

Spencer's capital contribution	40,000
Add: Share in partnership income	15,000
Less: Liabilities at last day of year	-20,000
Less: Cash distributed to Spencer	-10,000
Spencer's interest in partnership at the end of the year	25,000