Question

Owen and Jessica own and operate an S corporation. Each is a 50% owner. The business reports the following results:

Business revenue $ 225,000
Business expenses 88,000
Investment expenses 16,000

How do Owen and Jessica report these items for tax purposes?

A. $137,000 income on Schedule E; $88,000 investment expense on Schedule A
B. $68,500 income on Schedule E; $8,000 investment expense on Schedule A
C. $68,500 income on Schedule E; $16,000 investment expense on Schedule D
D. $225,000 income on Schedule E; $16,000 investment expense on Schedule A

Answer 1

The answer is B. $68,500 income on schedule E; $8,000 on schedule A

Step-by-step explanation:

An S corp is also known as a pass through entity. It is a form of corporation wherein income, taxes, losses or deductions are transferred to the other owners and are not borne by the entity. This is done in proportion of their shareholdings. In this case, 50%.

This implies that after computing net profit ( revenue less expenses) $22,5000- $88,000= $137,000 and then dividing proportionately, we obtaib $68,500 as income to be declared on schedule E.

The investment expense is also divided proportionately and reported on schedule A. That is, 50% of $16,000, which is $8,000.