Check my answer. Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the current year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a long-term capital gain of $15,000 and makes distributions to Ellie and Linda of $25,000 each. Discuss the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is: A partnership. Income generated for a partnership is taxable at the shareholder level Otter - less expenses = ordinary income (320,000-210,000=110,000) Add capital gain 110,000+15,000=125,000 taxable income Divide by each partners’ share (Ellie and Linda) = 125,000/2=62,500 taxable income for each partner. An S corporation. S Corps generally do not pay Federal Income tax. Income generated for an S Corp is passed through to the shareholder and each shareholder pays taxes on their share. Since there are two shareholders, Ellie, and Linda. Otter - less expenses = ordinary income (320,000-210,000=110,000) Add capital gain 110,000+15,000=125,000 taxable income Divide by each shareholder = 125,000/2=62,500 taxable income for each shareholder. A C corporation. Income generated for a C corp is taxable at the entity level. Dividends distributed to shareholders is also taxable but at the ordinary income rate of the individual taxpayer. The taxable income for Otter would be Otter - less expenses = ordinary income (320,000-210,000=110,000) Add capital gain 110,000+15,000=125,000 taxable income Shareholders of C corps pay taxes when the dividends are paid to them. Since Ellie and Linda were each paid $25,000, that is their taxable income

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Check my answer.

Ellie and Linda are equal owners in Otter Enterprises, a calendar year business. During the current year, Otter Enterprises has $320,000 of gross income and $210,000 of operating expenses. In addition, Otter has a long-term capital gain of $15,000 and makes distributions to Ellie and Linda of $25,000 each. Discuss the impact of this information on the taxable income of Otter, Ellie, and Linda if Otter is:

A partnership.

Income generated for a partnership is taxable at the shareholder level

Otter - less expenses = ordinary income (320,000-210,000=110,000)

Add capital gain 110,000+15,000=125,000 taxable income

Divide by each partners’ share (Ellie and Linda) = 125,000/2=62,500 taxable income for each partner.

An S corporation.

S Corps generally do not pay Federal Income tax. Income generated for an S Corp is passed through to the shareholder and each shareholder pays taxes on their share. Since there are two shareholders, Ellie, and Linda.

Otter - less expenses = ordinary income (320,000-210,000=110,000)

Add capital gain 110,000+15,000=125,000 taxable income

Divide by each shareholder = 125,000/2=62,500 taxable income for each shareholder.

A C corporation.

Income generated for a C corp is taxable at the entity level. Dividends distributed to shareholders is also taxable but at the ordinary income rate of the individual taxpayer. The taxable income for Otter would be Otter - less expenses = ordinary income (320,000-210,000=110,000)

Add capital gain 110,000+15,000=125,000 taxable income

Shareholders of C corps pay taxes when the dividends are paid to them. Since Ellie and Linda were each paid $25,000, that is their taxable income.

Definition Definition Arrangement between two or more people whereby they agree to manage business operations and share its profits and losses in an agreed ratio. The agreement drafted and signed by the partners of the firm is termed as a partnership deed and contains various important clauses agreed between the partners such as profit/loss sharing, interest on capital, remuneration allocation of each partner, and drawings of a partner.

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