Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation. For 2017, the corporation reported a total loss of $35,000 and made no cash distributions. For 2018, the corporation reported net income of $45,000 and made a cash distribution to the shareholders. Ian received $5,000 of this cash distribution in 2018. Ian is in the 24% marginal tax bracket and 15% dividend rate in both 2017 and 2018. How much income tax did Ian save for 2017 as a result of his share of loss from this corporation and how much income tax does Ian pay as a result of his ownership in the corporation for 2018?
A) zero tax savings in 2017 and $750 tax in 2018
B) zero tax savings in 2017 and $3,360 tax in 2018
C) $2,520 tax savings in 2017 and $3,360 tax in 2018
D) $2,520 tax savings in 2017 and $2,550 tax in 2018
E) $2,940 tax savings in 2017 and $3,780 tax in 2018

Question

Quizplus · Accepted Answer

Ian cannot deduct the corporation's loss on his personal tax return because it is a C corporation. Therefore, he has zero tax savings in 2017. In 2018, Ian's dividend income is taxed at 15%, so he pays $750 in tax on the $5,000 distribution.

Ian Contributes $9,000 in Exchange for a 30 Percent Interest