Desmond is the sole shareholder in Unicorn, Inc., an S corporation. At the beginning of 2020,...

Question

Desmond is the sole shareholder in Unicorn, Inc., an S corporation. At the beginning of 2020, Unicorn had AAA of $15,000 and AEP of $8,000. Desmond’s basis in his S corp stock was $16,000 at the beginning of 2020. During 2020, the corporation had operating income of $60,000 and a LTCL of $3,000. Desmond received a distribution of $80,000.

a. What are the tax implications to Desmond from his ownership of Unicorn? (i.e. What will be subject to tax?) Include both the amount of the taxable item and the character of the item (e.g. ordinary income, capital gain, dividend).

b. What are the ending balances in AAA, AEP and Desmond’s stock basis?

Bhavani · Accepted Answer

a) Tax implications to Desmond from his ownership of Unicorn are:
Desmond  has   two  tax  items  are  ordinary  business  income  and Long  term  capital  loss
Ordinary  business  income              = $60,000  
 Long  term  capital  loss                   = -$3000
              Long  term  capital  loss  can  set off  from  Long  term  capital  gain  but  IRS  allowed  to deduct ( if  married filing  jointly $3000 or $1500 filing  separately as capital  loss  from  the  ordinary  income,  remainder  will  be  carry  forward  to  next year.
 S  corporation doesn’t  have  corporate  taxes,  but share  holders should  pay the  tax.
b) What are the ending balances in AAA, AEP and Desmond’s stock basis?
AAA  ending  balance =  Beginning  balance + Net income  adjustments  - Distributions
=$15000+$57000 - $72000
=$0
Working  notes:
Net  income adjustments : Ordinary  income - Long  term  capital  gain 
=$60,

Desmond is the sole shareholder in Unicorn, Inc., an S corporation. At the beginning of 2020, Unicorn had AAA of $15,000 and AEP of $8,000. Desmond’s basis in his S corp stock was $16,000 at the...

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