Pepper, Inc., an S corporation, reports sales revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the interest income of $140,000.What is Pepper's passive income penalty tax payable, if any?

Question

Quizplus · Accepted Answer

To determine the passive income penalty tax payable, we need to calculate Pepper's taxable income:
Sales revenues: $400,000
Taxable interest: $380,000
Operating expenses: -$250,000
Deductions attributable to interest income: -$140,000
Taxable income: $390,000

Since Pepper is an S corporation, its taxable income is passed through to its shareholders and is not taxed at the corporate level. However, if more than 25% of its gross receipts come from passive income, it may be subject to a penalty tax.

Passive income = taxable interest + dividends + rents and royalties - deductions attributable to this income
Passive income = $380,000 + $0 + $0 - $140,000 = $240,000

Since Pepper's passive income represents less than 25% of its gross receipts, there is no penalty tax payable. Therefore, the correct answer is C) $40,895 (none).