Question

McLin, Inc. is a calendar year S corporation. Its accumulated adjustments account (AAA) balance is zero.

Answer 1

Total Tax could be saved by the S Corporation and Ruby is $6,120.

How can we save tax ?

1) Calculating the tax implications if Tobias receives a $90,000 salary:

The Tobias acknowledge the $90,000 in ordinary income. Tobias receives a $90,000 deduction from the Corporation. His stock basis is thus decreased to $0 as a result. He then has a $10,000 Loss Carryover.

Similar to part (a), but McLin gives Tobias a $90,000 dividend from AEP instead:

The Tobias family recognizes the $90,000 in dividend income. Pass-through without deductions; $80,000 in remaining stock basis. The AEP is then decreased to $0.

2) The Strauder's Ending OAA balance is calculated as follows:

Beginning Balance of OAA$5,200

Tax-exempt interest income$4,995

Life insurance premiums paid (nondeductible)($3,333)

Nontaxable life insurance proceeds$50,000

Ending Balance of OAA$57,362

Therefore, the Strauder's Ending OAA balance is $57,362.

3)Calculation of the Stock Bases of Each Shareholder at the End of the Year:

AndreCrumBarbaraBeginning basis$12,000$22,000$28,000

Add: Short Term Capital Gain ($37,500/3)$12,500$12,500$12,500

Nondeductible fees and penalties ($3,000/3)($1,000)($1,000)($1,000)

Long-term capital loss ($6,000/3)($2,000)($2,000)($2,000)

Net tax operating loss ($30,000/3)($10,000)($10,000)($10,000)

Less: Distribution, cash($6,000)($6,000)($6,000)

Ending Stock Basis$5,500$15,500$21,5004)

Calculation of the Total Tax could be Saved.

Ruby and the S Corporation can each save $3,060 in FICA taxes, for a total savings of $6,120:

Therefore, the Total Tax could be saved by the S Corporation and Ruby is $6,120.

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