Pepper, Inc., an S corporation, holds a $1 million balance in accumulated E&P. It 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

Pepper's passive income is $380,000 (taxable interest), minus $140,000 (deductions), for a total of $240,000. Pepper's accumulated E&P is $1 million, so the penalty tax rate is 35%. Therefore, Pepper's penalty tax payable is $84,000 ($240,000 x 35%). However, this amount cannot exceed the corporation's taxable income for the year, which is $150,000 ($400,000 - $250,000). Therefore, the penalty tax payable is $40,895 ($150,000 x 35%).