Bjorn owns a 35% interest in an S corporation that earned $200,000 in 2010.He also owns 10% of the stock in a C corporation that earned $200,000 during the year.The S corporation distributed $10,000 to Bjorn and the C corporation paid dividends of $10,000 to Bjorn.How much income must Bjorn report from these businesses?
A)$0 income from the S corporation and $0 income from the C corporation.
B)$10,000 income from the S corporation and $10,000 income from the C corporation.
C)$70,000 income from the S corporation and $0 income from the C corporation.
D)$70,000 income from the S corporation and $10,000 of dividend income from the C corporation.
E)None of the above.

Question

Quizplus · Accepted Answer

Bjorn's ownership interest in the S corporation generated $70,000 of income ($200,000 x 35%), which is taxable to him regardless of whether it was distributed or not. The $10,000 distribution from the S corporation is not taxable because it represents a return of Bjorn's investment in the company.

Similarly, Bjorn's ownership interest in the C corporation generated $20,000 of income ($200,000 x 10%), which is taxable to him regardless of whether it was distributed or not. The $10,000 of dividends received from the C corporation is also taxable to Bjorn.

Therefore, Bjorn must report $70,000 of income from the S corporation and $10,000 of dividend income from the C corporation on his tax return.

Bjorn Owns a 35% Interest in an S Corporation That