David Owns 25% of an S Corporation's Stock (A Capital

question 7

Essay

David owns 25% of an S corporation's stock (a capital asset)for the first three months of the S corporation's tax year. During the year, the S corporation has $16,000 of ordinary income and $32,000 of long-term capital gain. David starts the year with a basis of $50,000 in his S corporation stock and sells the stock for $56,000 on April 1 of the year. Assuming all months have 30 days, how much gain/loss does David report on the sale of the stock and what is its character?

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Definitions:

Variable Costing

An accounting method that only includes variable costs—costs that vary with production levels—when calculating the cost of producing a good or service.

Net Operating Income

The profit generated from a company’s everyday business operations, calculated by subtracting operating expenses from revenue.

Units Produced

The total number of units created by a production process over a specific period of time.

Break Even

The point at which total revenues equal total costs, resulting in neither profit nor loss.