Silver, Incorporated (S corporation) has $300,000 of gross receipts, $80,000 of interest income, and $20,000 of dividends for the current year. Silver also has $1,000 of earnings and profits (E&P) from prior C corporation years. Silver's taxable income would have been $30,000 this year if it had been a C corporation. What is Silver's excess net passive income tax?

Question

BlackTom AI · Accepted Answer

We start by identifying the key rule: an S corporation that has passive investment income (like interest and dividends) in excess of 25% of its gross receipts, and that has had C corporation earnings and profits (E&P) in the past, is subject to tax on the excess net passive income (NPI) at the corporate rate.
Option-by-option analysis:

- Option "$1,050": This would imply a very small tax, which would only occur if the excess NPI were $5,000 at a 21% rate, or if the rate were different. However, given the numbers, the calculation yields a much larger amount. Therefore this option misstates both the base and the rate.

- Option "$4,200": To reach $4,200, the excess NPI would need to be $20,000 if taxed at 21%, but the actual excess NPI here is not that high. The discrepancy shows a misalignment between gross receipts, passive income, and the 25% threshold, making this option inaccurate.

- Option "$5,250": This aligns with the standard calculation. Passive income includes interest ($80,000) and dividends ($20,000) for a total of $100,000. 25% of gross receipts ($300,000) is $75,000. The excess passive income is $100,000 − $75,000 = $25,000. The tax on excess net passive income is 21% of $25,000, which equals $5,250. This reflects both the threshold rule and the corporate tax rate.

- Option "$15,750": This would correspond to an excess NPI of $75,000 at 21%, which would require interest/dividends or gross receipts values that are not present here. The given numbers do not support such a large excess, so this option overstates the tax.

Putting it together, the only calculation that faithfully uses the 25%-of-gross-receipts threshold and the 21% corporate tax rate on the resulting excess NPI is the $5,250 figure, computed as described above.

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