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On January 1, 2022, Kinney, Inc., an S corporation, reports $26,400 of accumulated E &...

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Accounting

On January 1, 2022, Kinney, Inc., an S corporation, reports $26,400 of accumulated E & P and a balance of $66,000 in AAA. Kinney has two shareholders, Erin and Frank, each of whom owns 500 shares of Kinney's stock. Kinney's nonseparately stated ordinary income for the year is $33,000. Kinney distributes $39,600 to each shareholder on July 1, and it distributes another $19,800 to each shareholder on December 21. How are the shareholders taxed on the distributions? Ignore the 20% QBI deduction.

Erin and Frank each report $ ?????? dividend income for the July 1 distribution and $ ????? each for the December 21 distribution. Assuming that the shareholders have sufficient basis in their stock, Erin and Frank each receive a tax-free $ ???? distribution from AAA.

The amount of any distribution to an S corporation shareholder is equal to the cash plus the fair market value of any other property distributed. How the distribution is taxed depends upon whether the S corporation has C corporation accumulated earnings and profits (AEP). The AAA provides a mechanism to ensure that the earnings of an S corporation are taxed to shareholders only once.

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