Question

the coffee company engages in the following transactions during the taxable year: sells stock held for three years as an investment for $30,000 (adjusted basis of $20,000). sells land used in the business for $65,000. the land has been used as a parking lot and originally cost $40,000. receives tax-exempt interest on municipal bonds of $5,000. receives dividends on ibm stock of $80,000. describe the tax consequences of these transactions for the entity and its owners if the entity is organized as:

Answer 1

The tax consequences will depend on the type of entity. For corporations, there will be capital gains on the sale of stock and land. For partnerships and sole proprietorships, the gains/losses will be reported on individual tax returns.

Step-by-step explanation:

The tax consequences of the transactions for the coffee company and its owners will depend on the type of entity the company is organized as.

If the entity is organized as a Corporation:

1. The sale of stock will result in a capital gain of $10,000 (selling price of $30,000 minus adjusted basis of $20,000).
2. The sale of land will result in a capital gain of $25,000 (selling price of $65,000 minus original cost of $40,000).
3. The tax-exempt interest on municipal bonds will not be subject to federal income tax.
4. The dividends received on IBM stock will be subject to federal income tax at the applicable tax rate.

If the entity is organized as a Partnership or Sole Proprietorship:

1. The sale of stock and land will be treated as capital gains/losses on the individual tax returns of the owners.
2. The tax-exempt interest on municipal bonds will not be subject to federal income tax on the individual tax returns.
3. The dividends received on IBM stock will be subject to federal income tax at the applicable tax rate on the individual tax returns.