Question

During the current year, Walter invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Corporation X is a C corporation that has a taxable income of $200,000 and pays dividends totaling $50,000. Corporation Z is an S corporation that has a taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Walter

Answer 1

B) Only statement II is correct.

• II. Has $20,000 of taxable income from Corporation Z.

Step-by-step explanation:

One of the disadvantages of a C Corporation is that their owners (stockholders) are double taxed. That means that the corporation is taxed and then the stockholders are taxed depending on the dividends that they receive. In this case, Walter has $10,000 of taxable income from Corporation X (= $50,000 x 20%).

On the other hand, sole proprietorships, partnerships, limited liability companies and S Corporations are not taxed, they are pass through entities whose owners are taxed directly. In this case, Walter owns 20% of Corporation Z, therefore he must pay taxes on 20% of taxable income = $100,000 x 20% = $20,000.