Bread Corporation is a C corporation with earnings of $100,000. It paid $20,000 in dividends to its sole shareholder, Gerald. Gerald also owns 100% of Butter Corporation, an S corporation. Butter had net taxable income of $80,000 and made a $15,000 distribution to Gerald. What income will Gerald report from Bread and Butter's activities?
A)$35,000
B)$95,000
C)$100,000
D)$180,000

Question

Quizplus · Accepted Answer

For Bread Corporation: 
Earnings: $100,000 
Dividends paid to Gerald: ($20,000)

Gerald's taxable income from Bread Corporation: $100,000 - $20,000 = $80,000

For Butter Corporation: 
Net taxable income: $80,000 
Distributions to Gerald: ($15,000)

Gerald's taxable income from Butter Corporation: $80,000

Total taxable income for Gerald: 
$80,000 (from Butter Corporation) 
+ $80,000 (from Bread Corporation)

= $160,000

However, since Butter Corporation is an S corporation and its income flows through to Gerald, Bread Corporation's earnings are not subject to double taxation (i.e. taxed at the corporate level and at the shareholder level). Therefore, the $80,000 that Gerald received from Butter Corporation is not taxed again at the shareholder level.

Thus, Gerald will report a taxable income of $100,000, which includes the $80,000 from Bread Corporation and the $20,000 dividends from Butter Corporation that have already been taxed at the corporate level.

Bread Corporation Is a C Corporation with Earnings of $100,000