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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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?

Answered 3 days AfterFeb 23, 2023

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

Bhavani answered on Feb 27 2023

49 Votes

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
=$60,000-$3000
=$57000
Distributions= Beginning balance + ...

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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...

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

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