Explaining ordinary income and short-term capital gains

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1) Eureka, Inc., an electing S corporation, was formed in 2005 with an investment of cash by all stockholders. It immediately acquired certain capital assets for investment, many of which it decided in 2006 it did not need. The excess assets were sold in 2006 with a resulting long-term capital loss to the corporation of $40,000. Its ordinary income from operations for 2006 was $30,000. Operations for 2005 had been very successful, the corporation enjoying that year ordinary income of $50,000 and short-term capital gains of $15,000.

i) Eureka, Inc. will offset its 2006 capital loss against its 2006 ordinary income, and the shareholders will report a net capital loss of $10,000 on their individual returns

ii) Eureka, Inc. will carry the capital loss back to 2005, offset it against the capital gain, and be entitled to a refund of a part of the tax paid on its 2005 income

iii) Eureka, Inc. will carry the capital loss forward for the five subsequent years until it is offset by future capital gains

iv) The stockholders will report both the capital loss of $40,000 and the ordinary income of $30,000 on their individual 2006 returns on a per-share, per- day basis

 

Reference no: EM1334669

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