Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2011. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2011, but had $200,000 of ordinary income. In 2012, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2012?

Question

Quizplus · Accepted Answer

Since Cactus Corporation is an S Corporation, the income flows through to the shareholders in proportion to their ownership. Therefore, Tex's share of the 2011 income was $100,000 (50% of $200,000), which increased his basis to $100,000. In 2012, there was $100,000 of ordinary income and $100,000 in distributions. Since the distributions exceeded Tex's basis, he has a capital loss of $50,000 and his ordinary income is reduced to zero. This means that he will not be taxed on any of the 2012 income.

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