Question

In the current year, Riflebird Company had operating income of $220,000, operating expenses of $175,000, and a long-term capital loss of $10,000. How do Riflebird Company and Roger, the sole owner of Riflebird, report this information on their respective Federal income tax returns for the current year under the following assumptions?

a. Riflebird Company is a proprietorship (Roger did not make any withdrawals from the business). Roger reports $ ________ net operating profit and $_______ long-term capital loss on his tax return.
b. Riflebird Company is a C corporation (no dividends were paid during the year). Roger reports $__________ net operating profit and $________ long-term capital loss on his tax return.

Answer 1

a. Riflebird Company is a SOLE proprietorship (Roger did not make any withdrawals from the business). Roger reports $45,000 net operating profit and $10,000 long-term capital loss on his tax return.

Sole proprietorships are not taxed directly ,they are pass through entities. Their sole proprietor is taxed, and since individuals get taxed differently for ordinary income than capital income, they must segregate them.

b. Riflebird Company is a C corporation (no dividends were paid during the year). Roger reports $35,000 net operating profit and $0 long-term capital loss on his tax return.

Corporations do not segregate capital gains from ordinary income, so they must include them together in their income taxes.