CPA · Question 33 · Area II: Entity Tax Compliance
An S Corporation (formerly a C Corp) has Accumulated E&P (AEP) of $20,000. At year-end, its Accumulated Adjustments Account (AAA) is $15,000. The corporation distributes $40,000 cash to its sole shareholder. The shareholder's stock basis (before distribution) is $100,000. How is the distribution taxed?
Answer options:
$40,000 tax-free return of capital.
$15,000 tax-free, $20,000 dividend, $5,000 return of capital.
$20,000 dividend, $20,000 return of capital.
$40,000 dividend.
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