Jennifer owns 60% of the stock in Heath Corporation. During the current year, Heath Corporation has taxable income of $80,000 and pays dividends of $30,000. Which of the following statements about Jennifer's income from Heath Corporation is/are correct?
I.If Heath Corporation is an S corporation, Jennifer must recognize $48,000 of income.
II.If Heath Corporation is a corporation, Jennifer must recognize $18,000 of income.

A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Question

Jennifer owns 60% of the stock in Heath Corporation. During the current year, Heath Corporation has taxable income of $80,000 and pays dividends of $30,000. Which of the following statements about Jennifer's income from Heath Corporation is/are correct?
I.If Heath Corporation is an S corporation, Jennifer must recognize $48,000 of income.
II.If Heath Corporation is a corporation, Jennifer must recognize $18,000 of income.
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A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.

Quizplus · Accepted Answer

u200bIn an S corporation, income is passed through to the shareholders, so Jennifer must recognize her share of the income, which is 60% of $80,000, equaling $48,000. In a C corporation, dividends are distributed to shareholders from after-tax income, so Jennifer must recognize her share of the dividends, which is 60% of $30,000, equaling $18,000. Therefore, both statements are correct.

Jennifer Owns 60% of the Stock in Heath Corporation