Mr. and Mrs. Smith own and operate four separate businesses—W,X,Y, and Z. The ma
ID: 2599974 • Letter: M
Question
Mr. and Mrs. Smith own and operate four separate businesses—W,X,Y, and Z. The major characteristics of the businesses for this year can be summarized as follows:
Business
Legal Form
Pre-Distribution Taxable Income
Distribution to Owners
Taxable Income
W
Sole Proprietorship
30,000
15,000
30,000
X
Partnership*
50,000
-0-
50,000
Y
Corporation
142,000
52,000 (salary)
90,000
Z
S Corporation*
(20,000)**
7,000 (salary)
(27,000)
*The Adams’ share only.
**The Adams basis in the S Corporation shares was 25,000 at the beginning of this tax year.
The 15,000 distribution from W represents cash generated by the sole proprietorship used by the Adams to pay their son’s college tuition. They reinvested the remaining available cash in business equipment and inventory. The distributions from the two corporate businesses (X and Y) were actually salary payments to Mrs. Adams.
Based on the above data, what amount of AGI must the Adams report on their current-year federal tax return?
Which of the four businesses added more to the Adams’ taxable income than to their personal checking account (cash) balance? - Explain
Which of the four businesses added more to the Adams’ checking accounting (cash) balance than to their taxable income? - Explain
Business
Legal Form
Pre-Distribution Taxable Income
Distribution to Owners
Taxable Income
W
Sole Proprietorship
30,000
15,000
30,000
X
Partnership*
50,000
-0-
50,000
Y
Corporation
142,000
52,000 (salary)
90,000
Z
S Corporation*
(20,000)**
7,000 (salary)
(27,000)
Explanation / Answer
1.
AGI = 30000 (Sole Proprietorship) + 50000 (Partnership) + 52000 (Corporation) + 7000 (Salary-S Corporation) - 27000(Loss from S Corporation) = 112,000
2.
Partnership adds Zero amount to the personal checking account (cash) balance of Adams but it increases the taxable income by 50000 because income of partnership is taxed on the basis of income of the owners.
3.
S Corporation added 7000 to the Adams’ checking accounting (cash) balance whereas it reduced the tax liability by (27000).
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