C is corrent. The requirement is to determine the amount of income that should be separately stated from business income on Boles’ 2012 S corporation Form 1120-S Schedule K, Shareholders’ Shares of Income, Deductions, Credits, etc. As a pass-through entity, an S corporation’s items must be divided into (1) nonseparately stated income or loss from trade or business activities, and (2) items of income, loss, deduction, and credit the separate treatment of which could affect the tax liability of any shareholder. Boles’ gross receipts, supplies expense, and utilities expense are all ordinary income and deduction items and will be netted in arriving at Boles’ nonseparately stated business income. In contrast, the $5,000 of dividend income from investments must be separately stated and passed through to shareholders in order to preserve its characteristic as an item of portfolio income.
A is incorrect. The dividend income from investments must be separately stated because it is portfolio income.
B is incorrect. Only the dividend income from investments must be separately stated.
D is incorrect. Only the dividend income from investments must be separately stated.
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