Question

Alvin is the sole shareholder of an S corporation that earned 200,000 in 2015 and distributed75,000 to Alvin. How much income must Alvin recognize from the S corporation in 2015?

Answer 1

Alvin must report the full $200,000 of the S corporation's income on his personal tax return for 2015, despite receiving a $75,000 distribution, because S corporation profits are passed through to shareholders for reporting on their individual returns.

Step-by-step explanation:

Alvin must recognize the entire $200,000 of income earned by the S corporation in 2015. In an S corporation, profits and losses are passed through to shareholders and are reported on their individual tax returns, regardless of whether the income was distributed or not. Thus, Alvin has to report the $200,000 as personal income on his tax return, which will be subject to his individual income tax rate. The distribution of $75,000 is not counted as additional income but considered a non-taxable return of Alvin's investment in the corporation until the basis of his stock is reduced to zero.