Choice "D" is correct. Like partnerships, S corporations report both separately and non-separately stated items of income and/or loss. Allocations to shareholders are made on a per-share, per-day basis in accordance with ownership percentage. Shareholders in an S corporation must include on their personal income tax return their distributive share of each separate "pass-through" item. Shareholders are taxed on these items, regardless of whether or not these items have been distributed to them during the year.
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| EF's operating income | $ 200,000 |
| x Evan's ownership % | 40% |
| Gross income for Evan | $ 80,000 |
Choice "a" is incorrect. This answer option incorrectly assumes that Evan's gross income is calculated as 40% of the distribution for the year ($100,000 x 40%=$40,000) less the basis of $2,000 as of the beginning of the year ($40,000 - $2,000=$38,000).
Choice "c" is incorrect. This answer option incorrectly assumes that Evan's gross income is calculated as 40% of the distribution for the year ($100,000 x 40%=$40,000).
Choice "b" is incorrect. This answer option incorrectly assumes that Evan's gross income is 1 - 40%, or 60%, of the corporation's operating income for the year ($200,000 x 60%=$120,000), less the basis of $2,000 as of the beginning of the year ($120,000 - $2,000=$118,000).
