Ms. Watts owns stock in two S corporations, MKP Corporation and Reynolds Inc. This year, Ms. Watts had the following income and loss items. If Ms. Watts materially participates in the business of both corporations, compute her AGI.

Question

Ms. Watts owns stock in two S corporations, MKP Corporation and Reynolds Inc. This year, Ms. Watts had the following income and loss items.  If Ms. Watts materially participates in the business of both corporations, compute her AGI.

Quizplus · Accepted Answer

To compute Ms. Watts' AGI, we need to first determine the income/loss from each corporation:

- From MKP Corporation: She has a $25,000 loss, but since she materially participates in the business, this loss is not passive and can be used to offset other income.
- From Reynolds Inc.: She has $120,000 of ordinary business income, which is also not passive due to her material participation.

Adding these amounts together, we get a total income of $95,000 ($120,000 - $25,000).

To this taxable income, we add Ms. Watt's other income items:

- Salary: $60,000
- Short-term capital gains: $10,000
- Interest income: $7,700

Total other income: $77,700

Adding this to the income from the S corporations, we get an AGI of $127,700 (95,000 + 77,700). Therefore, the best choice is C.

Ms Watts Owns Stock in Two S Corporations, MKP Corporation