Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation.For 2018, the corporation reported a total loss of $35,000 and made no cash distributions.For 2019, 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 2019.Ian is in the 24% marginal tax bracket and 15% dividend rate in both 2018 and 2019.How much income tax did Ian save for 2018 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 2019?
A)zero tax savings in 2018 and $750 tax in 2019
B)zero tax savings in 2018 and $3,360 tax in 2019
C)$2,520 tax savings in 2018 and $3,360 tax in 2019
D)$2,520 tax savings in 2018 and $2,550 tax in 2019
E)$2,940 tax savings in 2018 and $3,780 tax in 2019

Question

Quizplus · Accepted Answer

In 2018, Ian cannot use the corporation's loss to offset his personal income because losses in a C corporation do not pass through to its shareholders. Therefore, he has no tax savings from the corporation's loss. In 2019, the $5,000 distribution Ian received is taxed as a dividend at the 15% rate, resulting in $750 ($5,000 * 15%) in tax.

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