Question

Action Sport is an S corporation owned equally by three shareholders. During the current year, Action Sport generated taxable income of $60,000. What is the tax treatment, if any, of the $60,000 income?

a. Action Sports will report and pay tax on $60,000.

b. Each shareholder will report $20,000 in taxable income.

c. Each shareholder will report the portion of income that he or she receives in cash, and Action Sport will pay tax on the remaining income.

d. S corporations are tax-exempt entities, so there is no tax liability resulting from Action Sport's operations.

Answer 1

The tax treatment of the $60,000 income generated by Action Sport, an S corporation owned equally by three shareholders, is that each shareholder will report $20,000 in taxable income.

Step-by-step explanation:

The tax treatment of the $60,000 income generated by Action Sport, an S corporation owned equally by three shareholders, is option b. Each shareholder will report $20,000 in taxable income.

In an S corporation, the income or loss generated by the corporation is passed through to the shareholders in proportion to their ownership percentage. This means that each shareholder will report their share of the income on their personal tax returns. In this case, with three equal shareholders, each will report $20,000 of taxable income.