The Polaris S Corporation has operating income of $50,000. Andrew is the sole shareholder of the corporation that has had the S election in effect since its inception. At the beginning of the current year, Andrew's basis in his S corporation stock is $2,000. During the year Andrew receives cash distributions totaling $55,000. How much income must Andrew recognize for the current tax year?
A)$50,000 ordinary income; $55,000 dividend income.
B)$50,000 ordinary income.
C)$50,000 ordinary income; $3,000 capital gain.
D)$55,000 dividend income; $3,000 capital gain.
E)$55,000 dividend income.

Question

Quizplus · Accepted Answer

Andrew must recognize $50,000 as ordinary income from the S corporation's operating income. The cash distribution exceeds his stock basis by $3,000 ($55,000 - $2,000 basis), which is treated as a capital gain.

The Polaris S Corporation Has Operating Income of $50,000