Answer:
a and b
At the level of entity, otter pays no taxes either on the capital gains or on the business income.
Members will pay taxes on the capital gains and on business income.
c
The distribution of $25,000 each will be taxable in the hands of members as it is a dividend income.
Business Income and Capital gain of entity will have no impact for Linda and Ellie on their income tax returns.
Explanation:
a A partnership and b. An S corporation
At the level of entity, otter pays no taxes either on the capital gains or on the business income.
Members will pay taxes on the capital gains and on business income.
Taxable income of each member:
Ellie
Business Income is $55,000
Capital Gain is $7,500
Linda
Business Income is $55,000
Capital Gain is $7,500
Business Income = Gross Income - Operating expense
= $320,000 - $210,000
= $110,000
Note: Distribution of $25,000 will have no impact, as it only decrease their basis in the firm or company.
c. A C corporation
Ottor pays for the business income which amounts to $110,000 as well as the Capital gain of $15,000 at the applicable tax rates.
Members pays taxes only when they receive the distribution which is dividends.
The distribution of $25,000 each will be taxable in the hands of members as it is a dividend income.
Business Income and Capital gain of entity will have no impact for Linda and Ellie on their income tax returns.
