Question

It is 2017 and Nala has the following investments. She owns 15% of Makuu & Associates. Makuu pays Nala $50,000 distribution (dividend) and has sales income of $600,000 and operating expenses of $100,000. How will Nala’s personal tax return be affected if?

a. Makkuu is a C-Corporation

b. Makkuu is a Partnership

c. Makkuu is a S-Corporation

d. Makkuu is an LLC, if you need more information please indicate what information you would need.

e. How would your answer change to part b if this were 2018 instead?

Answer 1

Dividends income received from a C Corporation is fully taxable in the hands of the shareholders. C Corporations are taxed at the corporate tax rate on its income and any distributions by way of dividends to shareholders also come under personal taxation.

When an S corporation distributes dividends out of its past accumulations and reserves and having no current year earnings or profits, then the dividend is non-taxable in the hands of the shareholders. But if the corporation distributes out of the current year earnings, then it becomes taxable in the hands of the shareholders. S corporation distribution of income is treated at the point when it arises and shareholders receiving dividends treat it as if the shareholder earns the dividend itself.

Both the partnership and an LLC are sorts of pass through entities. Both of these entities earn revenues and then pass this on to the shareholders. Shareholders have to report this income in their tax returns. Generally dividends from LLC and Partnerships are taxed on the basis of the percentage of holdings. If Nala has 15% stakeholding in the partnership then the total dividend multiplied by 15% is to be taxed in her hands and accordingly she needs to report this in her personal income tax return.