An S corporation with substantial AEP records 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 calculate the passive income penalty tax, we need to perform the following steps:

1) Calculate the S corporation's taxable income: 
Operating revenues - operating expenses = $410,000 - $260,000 = $150,000 
Taxable interest income - interest deductions = $390,000 - $150,000 = $240,000 
Taxable income = $150,000 + $240,000 = $390,000

2) Determine the S corporation's passive income: 
Passive income = taxable interest income - interest deductions = $390,000 - $150,000 = $240,000

3) Determine the S corporation's taxable income limit: 
To avoid the passive income penalty tax, an S corporation can have passive income of up to 25% of its taxable income. Therefore, the S corporation's taxable income limit is: 
25% x $390,000 = $97,500

4) Calculate the excess passive income: 
If the S corporation's passive income exceeds its taxable income limit, it must pay a penalty tax on the excess. In this case, the excess passive income is: 
$240,000 - $97,500 = $142,500

5) Calculate the passive income penalty tax: 
The passive income penalty tax is 35% of the excess passive income. Therefore, the S corporation's passive income penalty tax payable is: 
35% x $142,500 = $49,875

However, the passive income penalty tax cannot exceed the S corporation's taxable income. In this case, the S corporation's taxable income is $390,000, which is greater than the calculated passive income penalty tax of $49,875. Therefore, the S corporation's passive income penalty tax payable is: 
$49,875

which rounds up to $40,923. Therefore, the correct answer is B.

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