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?

Explanation:

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.

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 profits140000          0

dividends           36000

Explanation:

Miller Inc    

 S corporation     corporation

sales  34000003400000

cost of sales  1800000         1800000

gross profit  1600000  1600000

other income  250000         250000

gain on sale of stock  250000   250000

operating expenses  900000900000

Net Profit   950000         950000

dividends  0       180000

taxable income of Miller Inc    

             S corporationCorproration

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.

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