Question

Oxen Corporation incurs the following transactions.

Net income from operations $100,000
Interest income from savings account 3,000
Long-term capital gain from sale of securities 10,000
Short-term capital loss from sale of securities 4,000

Oxen maintains a valid S election and does not distribute any assets (cash or property) to its sole shareholder, Megan. As a result, Megan must recognize (ignore 20% QBI deduction):
a. Ordinary income of $103,000.
b. Ordinary income of $103,000 and long-term capital gain of $6,000.
c. Ordinary income of $109,000.
d. Ordinary income of $103,000, long-term capital gain of $10,000, and $4,000 short-term capital loss.

Answer 1

As an S corporation shareholder, Megan must recognize an ordinary income of $103,000 and a long-term capital gain of $6,000 on her tax return.

Step-by-step explanation:

Megan, as the sole shareholder of Oxen Corporation, which has an S election in place, has to report the income and losses from the corporation on her tax return. The net income from operations, amounting to $100,000, is considered ordinary income. Her share of the interest income from savings accounts adds $3,000 in ordinary income. The long-term capital gain of $10,000 from the sale of securities is reported as a capital gain. The short-term capital loss of $4,000 can offset capital gains but cannot be used to offset ordinary income for S corporation shareholders on their returns. Megan cannot directly offset the ordinary income with the capital loss, only the capital gains. Hence, Megan must recognize an ordinary income of $103,000 (operations income plus interest income) and a long-term capital gain of $6,000 (the net of the capital gain and capital loss).