Earl and Sandra own and operate a restaurant as an S corporation.Each is a 50% owner.The business reports the following results for the year: $\begin{array}{lr}
\text { Revenue } & \$ 480,000 \
\text { Business expenses } & 398,000 \
\text { Investment expenses } & 32,000
\end{array}$ How do Earl and Sandra report these items for tax purposes on each of their individual returns?

Question

Quizplus · Accepted Answer

The net income from the S corporation is $480,000 (revenue) - $398,000 (business expenses) = $82,000. This income is divided equally between Earl and Sandra, so each reports $41,000 on Schedule E, part of their individual tax returns. Investment expenses are not business expenses of the S corporation and are reported separately on Schedule A, but they are subject to various limitations. Since the question does not specify how these limitations apply, the simplest assumption is that each owner would report half of the investment expenses, or $16,000 each, on Schedule A.

Earl and Sandra Own and Operate a Restaurant as an S