Question

mercury stage withdraws $20,000 from the s corporation of which she is a 100-percent owner. her adjusted basis in her s corporation interest is $150,000. what is the tax consequence of this transaction to mercury stage? a. mercury has $20,000 of taxable dividend income. b. mercury has no taxable income. c. mercury has $20,000 of compensation income. d. none of the above.

Answer 1

Mercury Stage would have no taxable income from the withdrawal of $20,000 from her S Corporation since the distribution doesn't exceed her adjusted basis in the corporation. Therefore, the correct option is b. mercury has no taxable income.

Step-by-step explanation:

If Mercury Stage withdraws $20,000 from the S Corporation of which she is a 100-percent owner and her adjusted basis in her S Corporation interest is $150,000, she would experience no immediate tax consequence. The withdrawal is considered a distribution of the S Corporation's earnings.

Because her basis in the corporation is more than the distribution ($150,000 versus $20,000), the withdrawal will not exceed her stock basis and is therefore not subject to tax. It is essentially a return of her capital in the corporation. The tax consequence of this transaction to Mercury Stage would most accurately be captured by option B: Mercury has no taxable income.