Ramona owns 20% of the stock of Miller, Inc. Miller reports the following items for the current year: Sales $3,400,000 Gain on sale of stock held for 2 years 250,000 Cost of goods sold 1,800,000 Operating expenses 900,000 Dividends paid to stockholders 180,000 What are the effects on Ramona's taxable income if Miller, Inc. is organized as: a. A corporation? b. An S corporation?

Answer: on S corporation taxable income will be affected by 140,000 and on corporation it will be 36000

Taxable income of Ramona

S corporation Corporation

share on profits 140000 0

dividends 36000

Explanation:

Miller Inc

S corporation corporation

sales 3400000 3400000

cost of sales 1800000 1800000

gross profit 1600000 1600000

other income 250000 250000

gain on sale of stock 250000 250000

operating expenses 900000 900000

Net Profit 950000 950000

dividends 0 180000

taxable income of Miller Inc

S corporation Corproration

Net Profit 950000 950000

gain on sale of stock - 250000 - 250000

Taxable Income 700000 700000

for the S corporation Miller gets a share of 20% on the taxable profits of the S corporation and on the corporation he gets 20% of the total dividends to shareholder. The gain is capital in nature and is not taxable income as per SARS.

a) A corporation?

A Corporations are taxable entities. Miller, Inc. will pay tax on its income. Ramona will be taxed on dividends received. Ramona has $36,000 ($180,000 x 20%) of dividend income from Miller. The dividend income will be taxed at 15%.

b) An S corporation?

An S corporations are conduit entities and do not pay tax on their income. The income from the conduit flows through and is taxed to the owners of the S corporation. Ramona will be taxed on 20% of Miller's income. Capital gains and losses of conduit entities must be reported separately, so that the owners can properly treat them in the calculation of their net capital gain or loss for the year. Miller has $700,000 ($3,400,000 - $1,800,000 - $900,000) of operating income and a $250,000 long-term capital gain in the current year. Ramona must include $140,000 ($700,000 x 20%) of ordinary income and $50,000 ($250,000 x 20%) of long-term capital gain on her individual return. The $140,000 of ordinary income is added to Ramona's gross income. The long-term capital gain of $50,000 is netted with other capital gains and losses. Because the income of the conduit is being taxed at the owner level, dividends paid to owners are considered to be returns of capital investment and are not taxed.