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Ellie and linda are equal owners in otter enterprises, a calendar year business. during the current year, otter enterprises has $320,000 of gross income and $210,000 of operating expenses. in addition, otter has a long-term capital gain of $15,000 and makes distributions to ellie and linda of $25,000 each. what is the impact of this information on the taxable income of otter, ellie, and linda?

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Answer:

Otter Enterprises will be taxed differently depending on what type of business it is. If it is a partnership, LLP, LLC or S corporation, then it is a pass through business, which means it is not taxed directly, instead its owners are taxed directly. If it is a C corporation, then it has to pay corporate taxes and the owners pay income taxes.

  • Partnership, LLP and LLC: net operating profit = $320,000 - $210,000 = $110,000 + long term capital gains $15,000. Ellie and Linda must each pay income taxes for $55,000 and capital gains taxes for $7,500.
  • S corporation: The S corporation will pay employer taxes on the $50,000 distributed to Ellie and Linda (owner-employee relationship), and then Ellie and Linda must pay income taxes for the remaining net income and capital gains taxes for the capital gains (similar to a partnership).
  • C corporation: must pay corporate taxes on its net profits + capital gains, and then Ellie and Linda must pay income taxes for any dividends received. The retained earnings account (what is left after taxes and dividends) is not taxed until dividends are distributed.

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