Question

On January 1, Year 1, Ginger, an individual, paid $30,000 for 7 percent of the stock in Root Corp., an S corporation. In November Year 1 he loaned $11,000 to Root Corp. in return for a promissory note. Root Corp. generated a $750,000 operating loss in Year 1 . Root Corp. generated $423,000 ordinary business income in Year 2 . Required: a. How much of Ginger's share of this income is included in his Year 2 taxable income?

Answer 1

In Year 2, Ginger's share of the income from Root Corp. that is included in his taxable income is $29,610.

Ginger's share of income from Root Corp. would be included in his Year 2 taxable income. To determine the amount, we need to consider the concept of Pass-Through taxation for S corporations. As an S corporation, the company does not pay federal taxes; instead, the profits and losses are passed through to the individual shareholders.

In Year 2, Ginger generated $423,000 in ordinary business income from Root Corp. Since Ginger owns 7 percent of the stock, his share of the income would be calculated as:

$423,000 * 7% = $29,610

Therefore, Ginger would include $29,610 in his Year 2 taxable income from Root Corp.

Learn more about Pass-through taxation