Question

Julio and Milania are owners of Falcons Corporation, an S corporation. They each own 50 percent of Falcons Corporation. In year 1, Julio and Milania each received distributions of $15,000 from Falcons Corporation.

Falcons Corporation (an S Corporation)
Income Statement
December 31, Year 1 and Year 2
Year 1 Year 2
Sales revenue $ 300,000 $ 430,000
Cost of goods sold (40,000) (60,000)
Salary to owners Julio and Milania (40,000) (80,000)
Employee wages (25,000) (50,000)
Depreciation expense (20,000) (40,000)
Section 179 expense (30,000) (50,000)
Interest income (related to business) 12,000 22,500
Municipal bond income 1,500 4,000
Government fines 0 (2,000)
Overall net income $ 158,500 $ 174,500
Distributions $ 30,000 $ 50,000
a. What amount of ordinary income and separately stated items are allocated to them for year 1 based on the information above? Assume that Falcons Corporation has $200,000 of qualified property (unadjusted basis).


Amount Allocated to Julio Allocated to Milania
Ordinary Income

Answer 1

The ordinary income allocated to each shareholder, Julio, and Milania, for Year 1 is $79,250. Separately stated items include their respective 50% shares of business-related interest income and tax-exempt municipal bond income, which are $6,000 and $750, respectively.

Step-by-step explanation:

To determine the amount of ordinary income and separately stated items allocated to Julio and Milania for year 1, we must look at Falcons Corporation's income statement and understand the rules for taxation of S corporations.

Falcons Corporation's overall net income for year 1 is $158,500. Since Julio and Milania each own 50% of the corporation, they would each report 50% of the income and deductions.

Calculation of Ordinary Income

Each owner's share (50%): $158,500 x 50% = $79,250

Interest income: $12,000 (reported separately)

Municipal bond income: $1,500 (which is tax-exempt and must be reported separately)

Hence, the ordinary income attributed to each owner is $79,250 and separately stated items include their respective shares of interest income and municipal bond income, which would be $6,000 and $750, respectively, for year 1.

Answer 2

The amount of separately stated items allocated to Milania is $6,000.

Step-by-step explanation:

To determine the amount of ordinary income allocated to Julio and Milania for year 1, we need to consider their ownership percentages in Falcons Corporation. Since they each own 50% of the corporation, they will each be allocated 50% of the ordinary income.

From the given information, the overall net income for year 1 is $158,500. Therefore, the amount of ordinary income allocated to Julio is:

$158,500 * 50% = $79,250

Similarly, the amount of ordinary income allocated to Milania is also $79,250.

Now, let's consider the separately stated items. The only separately stated item mentioned in the given information is the interest income related to the business, which is $12,000. Since Julio and Milania each own 50% of Falcons Corporation, they will also each be allocated 50% of the separately stated items.

Therefore, the amount of separately stated items allocated to Julio is:

$12,000 * 50% = $6,000

And the amount of separately stated items allocated to Milania is also $6,000.