RGD Corporation was a C corporation from its inception in 2014 through 2018. However, it elected S corporation status effective January 1, 2019. RGD had $50,000 of earnings and profits at the end of 2018. RGD reported the following information for its 2019 tax year.DescriptionAmountConsulting revenue$99,000 Salary to owners (40,000)Employee wages (30,000)Depreciation expense (5,000)Municipal bond interest 6,000 Interest income 42,000 Dividend income 25,000 Overall net income$97,000 What amount of excess net passive income tax is RGD liable for in 2019? Assume the corporate tax rate is 21%.
What will be an ideal response?
$6,300 (21% × $30,000). Passive investment income is $73,000 ($6,000 municipal bond interest + $42,000 interest income + $25,000 dividend income). Gross receipts of $172,000 ($99,000 consulting revenue + $6,000 municipal bond interest + $42,000 interest income + $25,000 dividend income). Expenses in producing passive investment income are $0.
Excess net passive income is $30,000, computed as $73,000 × [$73,000 ? (25% × $172,000)]/$73,000.
Consequently, the excess net passive income tax is $6,300 = 21% × $30,000.
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