Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2018. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2018, but had $200,000 of ordinary income. In 2019, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2019?

Question

Quizplus · Accepted Answer

Since Cactus Corporation is an S Corporation and the distributions in 2019 were $100,000, it means that all of the shareholders must have received a distribution of $50,000 each.

To calculate Tex's ordinary income for 2019, we need to take into account his share of the earnings and profits accumulated by Cactus Corporation.

Since Tex owns 50% of the stock, he is entitled to 50% of the earnings and profits. Therefore, his share of the earnings and profits at the beginning of 2018 was $50,000 ($100,000 x 50%).

During 2019, Cactus Corporation had $100,000 of ordinary income. Since Tex owns 50% of the stock, his share of the ordinary income was $50,000 ($100,000 x 50%).

Finally, we need to subtract the $50,000 distribution that Tex received in 2019 from his share of the ordinary income.

$50,000 (Tex's share of ordinary income) - $50,000 (distribution received) = $0

Therefore, Tex's ordinary income for 2019 is $0.

The correct answer is B because Tex's share of the ordinary income was $50,000, but he received a distribution of $50,000, which means his ordinary income is reduced to $0.

Cactus Corporation, an S Corporation, Had Accumulated Earnings and Profits