Question

Which type of distribution from an S corporation is taxed at ordinary income rates?

1) AEP
2) OAA
3) AAA
4) None of these items are taxed as ordinary income.

Answer 1

The Accumulated Adjustments Account (AAA) distribution from an S corporation is typically not taxed at ordinary income rates since it represents undistributed income already taxed. Owners of corporations, even as sole employees, must pay various federal taxes including income tax, self-employment tax if applicable, and payroll taxes. Social security tax is regressive as it disproportionately impacts lower income earners.

Step-by-step explanation:

The type of distribution from an S corporation that is taxed at ordinary income rates is the Accumulated Adjustments Account (AAA). The AAA represents the undistributed income that has already been taxed at the shareholder level and is not taxed again upon distribution. This differs from an Account Previously Taxed (AEP) which refers to previously taxed income that can be distributed tax-free. It is important to note that distributions from the Other Adjustments Account (OAA) do not typically lead to ordinary income taxation as it contains other adjustments that do not relate to the corporation's earnings and profits.

If an individual owns a corporation and is the only employee, they will be liable to pay a range of federal taxes, including income taxes, self-employment taxes (if they are considered self-employed), payroll taxes (which include social security and Medicare taxes), and potentially other taxes depending on the specific circumstances of their corporation.

For a self-employed individual running an unincorporated business, they will have to pay both the employee and employer portions of social security and Medicare taxes, known collectively as self-employment taxes. These are in addition to federal income tax.

The social security tax of 6.2% on employee income earned below $113,000 is a regressive tax because it takes a larger percentage of income from low-income earners than from high-income earners; above a certain threshold, no additional tax is levied.

Answer 2

The Accumulated Adjustments Account (AAA) distribution from an S corporation is taxed at ordinary income rates. Owners of corporations as sole employees pay corporate income and employment taxes, while self-employed individuals pay self-employment and income taxes. Social Security tax is regressive as it taxes at a flat rate.

Step-by-step explanation:

The type of distribution from an S corporation that is taxed at ordinary income rates is Accumulated Adjustments Account (AAA). Although S corporation distributions are generally tax-free to the extent of the shareholder's stock basis after the corporation's earnings have been taxed at the corporate level, the AAA can affect how distributions are taxed. The AAA is an account which tracks the undistributed taxable income that has been previously taxed to shareholders. When distributions exceed the AAA, they can be taxed at ordinary income rates.

Regarding the different types of federal taxes an individual will have to pay if they own a corporation for which they are the only employee, they will need to pay corporate income tax, employment taxes (which include Social Security and Medicare taxes), and potentially other taxes such as excise taxes, depending on the nature of the business.

If the business is not incorporated and the individual is self-employed, they will pay self-employment tax (which is a combination of Social Security and Medicare taxes) and income tax.

The Social Security tax is considered a regressive tax because it is a flat rate up to a certain income level; it does not progressively tax higher incomes at higher rates.