Question

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect? a. Eduardo must report $80,000 of income on his return. b. Luis must report $80,000 of income on his return. c. Eduardo’s proprietorship is not required to pay income tax on $80,000. d. Luis’s corporation must pay income tax on $80,000. e. None of the above.

Answer 1

The incorrect statement is b, since Luis, a sole shareholder of a C corporation, does not report the corporation's income of $80,000 on his personal return; the corporation is taxed separately on its profits.

Step-by-step explanation:

The question presented involves understanding how income is reported and taxed for different types of business structures, specifically comparing a regular C corporation with a sole proprietorship. Options a and c are accurate. For a sole proprietorship, like Eduardo's, the business is not taxed separately; instead, all profits are reported on Eduardo's personal income tax return. Eduardo thus reports $80,000 of income, which corresponds to his business's profit. Option c is also true in that a sole proprietorship does not pay income tax as a separate entity.

Luis, as the sole shareholder of a C corporation, faces a different tax situation, which is described by option d. The corporation is taxed separately from Luis on its profits, and hence must pay income tax on its $80,000 of earnings before any distributions are made to Luis. Option b is incorrect because Luis personally would not report the entire $80,000 of the C corporation's income on his personal income tax return. Instead, he would report whatever dividend income he received from the corporation, if any, which in this scenario is unspecified. The $50,000 that Luis withdraws could be a salary or a dividend, which would be taxed differently on Luis's personal tax return.

Answer 2

B) Luis must report $80,000 of income on his return.

Step-by-step explanation:

Shareholders of C corporations are not required to report the profits of the corporation in their adjusted gross income. They must report the amount of money they receive as dividends or in this case money withdrawals. The advantage that Eduardo has over Luis is that Luis will be subject to double taxation, since the company must pay corporate taxes and he must also pay personal income taxes.