Question

Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000 and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect? a. Eduardo must report $80,000 of income on his return. b. Luis must report $80,000 of income on his return. c. Eduardo’s proprietorship is not required to pay income tax on $80,000. d. Luis’s corporation must pay income tax on $80,000. e. None of the above.

Answer 1

Answer:

B) Luis must report $80,000 of income on his return.

Explanation:

Shareholders of C corporations are not required to report the profits of the corporation in their adjusted gross income. They must report the amount of money they receive as dividends or in this case money withdrawals. The advantage that Eduardo has over Luis is that Luis will be subject to double taxation, since the company must pay corporate taxes and he must also pay personal income taxes.