Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $\begin{array}{llr}
\text { Sales revenue} &\$500,000\
\text {Interest income } &6,000\
\text { Long-term capital gain } &10,000\
\text {Cost of goods sold } &(250,000)\
\text {Salary and wages } &(75,000)\
\text { other operating expenses } &(55,000)\
\end{array}$

Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year.

Question

Waters Corporation is an S corporation with two equal shareholders, Mia Jones and David Kerns. This year, Waters recorded the following items of income and expense: $\begin{array}{llr}
  \text {  Sales revenue} &\$500,000\
 \text {Interest income  } &6,000\
 \text { Long-term capital gain } &10,000\
 \text {Cost of goods sold  } &(250,000)\
 \text {Salary and wages  } &(75,000)\
 \text { other operating expenses } &(55,000)\
\end{array}$

Waters distributed $25,000 to each of its shareholders during the year. If Mia's adjusted tax basis in her partnership interest was $50,000 at the beginning of the year, compute her adjusted tax basis in her partnership interest at the end of the year.

Quizplus · Accepted Answer

Mia's adjusted tax basis at the end of the year is calculated by starting with her initial basis ($50,000), adding her share of the corporation's income, and subtracting her share of the distribution. The corporation's income is calculated as follows: Sales revenue ($500,000) + Interest income ($6,000) + Long-term capital gain ($10,000) - Cost of goods sold (-$250,000) - Salary and wages (-$75,000) - Other operating expenses (-$55,000) = $136,000. Each shareholder's share of the income is half of $136,000, which is $68,000. Subtracting Mia's distribution of $25,000 from her share of the income ($68,000) and adding this net amount to her initial basis ($50,000) gives her an adjusted basis of $93,000 at the end of the year.

Waters Corporation Is an S Corporation with Two Equal Shareholders