Question

(1) ABC is a regular corporation – i.e., not an S corporation. On your 2019 Form 1040, you will report ___ of gross income from ABC. Why is that the correct amount?

(2) Your favorite hobby is fishing. Last week you entered a fishing contest and – Wow! – caught the biggest fish and won the $25,000 grand prize.

But you’re also a partner in a Big 4 accounting firm and make almost $500,000 a year there, so another $25,000? . . . you don’t really need it. You tell the contest sponsor “Thanks but no thanks” and ask that the money be donated directly to the American Red Cross instead. That is exactly what happens.

Do you need to include the $25,000 in your 2020 gross income? Why or why not?

 

Answer 1

1. First of all let us understand the meaning of regular corporation & s-corporation:-

• Regular Corporation:- A regular corporation also known as c corporation is taxed as a separate entity. The corporation must file a form 1120 each year to report its income and to claim its deduction & credits. After the corporate income tax is paid on the business income, any distribution made to stockholders are taxed again at the stockholders' tax rates as dividends. Income paid to shareholders as wages are also taxed on the shareholder's personal income tax return. DIstribution to be shown in form 1040 by shareholders.
• S- Corporation:- S corporation are merely corporations that elect to pass corporate income, losses, deductions, & credit through to their shareholders for federal tax purpose. Taxation of S corporation resembles that of partnership.

2. The American red cross society is recognized by the IRS as a not for profit 501c3 charitable organization. Donation to the red cross is tax-deductible to the full extent of the law. All monetary donation to red cross is Tax deductible.

• For the Tax Year 2020 only, you may deduct cash contribution to the American red cross society and most other public charities to offset up to 100% of your income.
• Ordinarly, the income tax charitable deduction for cash gifts is limited to 60% of your income.
• This 100% limit allows especially generous donors to reduce their 2020 federal income tax to zero.
• If you are even more generous, you can carry forward unused cash contribution deductions for up to five years.

So, as per the above explanation, $25,000 is to be included in gross income and then is to deduct from gross income 100%.

Gross Income = $(5,00,000+25,000)

Less :- $25,000

Taxable Income = $500,000 Answer