Barnum and Bailey incorporated their circus this year and elected to be treated as an S corporation.Barnum owns 60% of the corporation's stock while Bailey owns the remaining 40%.This year, the corporation had net income of $300,000 before the owners took any money out of the business (e.g., before salaries, dividend distributions, etc.).Assuming the corporation paid Barnum a deductible salary of $100,000 for managing the business and made dividend distributions of $12,000 to Barnum and $8,000 to Bailey, what is the amount of taxable income to be reported by Barnum?
A)$220,000
B)$192,000
C)$180,000
D)$108,000
E)None of the above

Question

Quizplus · Accepted Answer

The first step is to determine the corporation's taxable income before the owners' distributions. In this case, it is $300,000.

Next, we need to subtract Barnum's deductible salary of $100,000 from the corporation's taxable income to arrive at the taxable income allocated to the shareholders.

$300,000 - $100,000 = $200,000

The next step is to allocate the dividend distributions. Because Barnum owns 60% of the corporation's stock, he will receive 60% of the total dividend distributions:

$12,000 + ($8,000 * 0.6) = $16,800

Finally, we subtract Barnum's share of the dividend distributions from his allocated taxable income:

$200,000 - $16,800 = $183,200

Since Barnum's taxable income exceeds the threshold for the highest S corporation tax rate, we must also factor in the built-in gains tax. This tax is assessed on any appreciated assets held by the corporation when it elected to become an S corporation.

Assuming the corporation does have built-in gains, the built-in gains tax rate for this year is 21%.

$183,200 * 0.21 = $38,472

Therefore, Barnum's total taxable income for the year is:

$183,200 + $38,472 = $221,672

rounded to the nearest thousand: $220,000

Barnum and Bailey Incorporated Their Circus This Year and Elected