Hazel Is the Sole Shareholder of Maple Corp

question 114

Essay

Hazel is the sole shareholder of Maple Corp.In 2019 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits).In 2019, Maple elected S corporation status.During 2020 Maple reported $12,000 of ordinary business income and no separately stated items.It also distributed $25,000 to Hazel.What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2020 (after accounting for the distribution)if her basis at the beginning of the year was $5,000?

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Definitions:

Internal Growth Rate

The maximum rate at which a company can expand using only its own sources of funding without resorting to external financial options.

Constant Percentage

A fixed percentage rate applied to various mathematical and financial calculations.

Retains Earnings

Retains Earnings are the portion of net income that is not distributed to shareholders as dividends, but rather retained by the company for reinvestment or to pay off debt.

Sustainable Growth Rate

The maximum rate at which a company can grow its sales and earnings without needing to increase its financial leverage.