An S corporation with substantial AEP has operating revenues of $410,000, taxable interest income of $390,000, operating expenses of $260,000, and deductions attributable to the interest of $150,000. The passive income penalty tax payable, if any, is:

Question

Quizplus · Accepted Answer

To determine if the S Corporation is subject to the passive income penalty tax, we need to calculate the ratio of the S Corporation's passive income to its taxable income.

Passive Income = $390,000 (taxable interest income) - $150,000 (deductions attributable to the interest) 
Passive Income = $240,000

Taxable Income = $410,000 (operating revenues) - $260,000 (operating expenses) + $240,000 (passive income) 
Taxable Income = $390,000

Ratio of Passive Income to Taxable Income = $240,000 / $390,000 = 0.615

Since the ratio is less than 0.5 (the threshold for the passive income penalty tax), the S Corporation is not subject to the penalty tax.

Therefore, the answer is B) $40,923 (which is not applicable).

An S Corporation with Substantial AEP Has Operating Revenues of $410,000