Salem Inc. is an electing S corporation with current year operating income of $300,000. The $300,000 does not include the amount it realized on the sale of a building for $330,000. The building was purchased in 2004 for $250,000 and $20,000 in straight-line depreciation had been taken on the building up to the date of its sale. How should Salem Inc. report these results to its shareholders?
A)Operating income of $320,000 and Section 1231 gain of $80,000.
B)Operating income of $400,000.
C)Operating income of $304,000 and Section 1231 gain of $96,000.
D)Operating income of $380,000 and unrecaptured Section 1250 gain of $20,000.
E)Operating income of $300,000 and Section 1231 gain of $80,000 and unrecaptured Section 1250 gain of $20,000.

Question

Quizplus · Accepted Answer

Salem Inc. is an electing S corporation, which means that all of its income and losses are passed through to its shareholders.

First, we need to calculate the taxable gain on the sale of the building:

Selling price: $330,000 
Cost basis: $250,000 - $20,000 = $230,000

Taxable gain = Selling price - Cost basis = $330,000 - $230,000 = $100,000

Since the building was held for more than one year, the $100,000 gain is classified as a Section 1231 gain.

Therefore, Salem Inc.'s reported results to its shareholders should be as follows:

Operating income: $300,000 
Section 1231 gain: $100,000 
Total taxable income: $300,000 + $100,000 = $400,000

However, we need to keep in mind that if Salem Inc. has any net capital losses, these losses must first offset the Section 1231 gain before being used to offset ordinary income.

Salem Inc Is an Electing S Corporation with Current Year Operating