ExpertHard1 markMultiple Choice
CPA · Question 31 · Area V: Entity Taxation
A taxpayer holds a 50% interest in an S Corporation. At the beginning of the year, their stock basis was $10,000. During the year, the S Corp reported: Ordinary Income $5,000; Tax-Exempt Interest $1,000; Cash Distribution to Taxpayer $8,000. What is the taxpayer's stock basis at the end of the year?
A taxpayer holds a 50% interest in an S Corporation. At the beginning of the year, their stock basis was $10,000. During the year, the S Corp reported: Ordinary Income $5,000; Tax-Exempt Interest $1,000; Cash Distribution to Taxpayer $8,000. What is the taxpayer's stock basis at the end of the year?
Answer options:
A.
$7,000
B.
$8,000
C.
$5,500
D.
$5,000
How to approach this question
1) Calculate share of income items (50%). 2) Add to basis (including tax-exempt). 3) Subtract distribution.
Full Answer
D.$5,000✓ Correct
D
Beginning Basis: $10,000. Increases: 50% of Ordinary Income ($2,500) + 50% of Tax-Exempt Interest ($500). Subtotal: $13,000. Decrease: Distribution received ($8,000). Ending Basis: $5,000. Note: Tax-exempt income increases basis to prevent it from being taxed upon distribution.
Common mistakes
Forgetting to apply the ownership percentage to the corporate income figures, or ignoring tax-exempt interest.
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