Question

Ordinary business income allocated to shareholders by an S corporation is typically treated as:

a. Passive Income
b. Capital Gain
c. Ordinary Income
d. Tax-Exempt Income

Answer 1

Ordinary business income from an S corporation is treated as ordinary income for shareholders, who report it on their personal tax returns.

Step-by-step explanation:

Ordinary business income allocated to shareholders by an S corporation is typically treated as ordinary income. This means answer option c, ordinary income, is the correct choice. Unlike C corporations, which are subject to the "double taxation" phenomenon where both the company and the dividends paid to shareholders are taxed, S corporations pass through most of their income, losses, deductions, and credits to their shareholders for federal tax purposes. Shareholders of an S corporation report the pass-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

Ordinary business income allocated to shareholders by an S corporation is typically treated as Ordinary Income.When an S corporation generates income, it passes that income through to its shareholders, who report it on their individual tax returns. This income is considered ordinary income and is subject to regular income tax rates.For example, if an S corporation earns $100,000 in net income and has two equal shareholders, each shareholder will report $50,000 of ordinary income on their tax return.