Deck 11: S Corporations

Question 1

The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

Answer 1

False

Question 2

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

Answer 2

False

Question 3

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year.

Answer 3

False

Question 4

An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end.

Question 5

Bobby T (95 percent owner) would like to elect S corporation status for DJ, Inc., but Dallas (5 percent owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc., without Dallas's consent.

Question 6

The same exact requirements for forming and contributing property govern S corporations and partnerships.

Question 7

Bobby T (75 percent owner) would like to terminate the S corporation status of DJ, Inc., but Dallas (5 percent owner) does not want to terminate S corporation status. Bobby T can terminate the S corporation status for DJ, Inc., without Dallas's consent.

Question 8

An S corporation election may be voluntarily or involuntarily terminated.

Question 9

After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.

Question 10

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Question 11

Publicly traded corporations cannot be treated as S corporations.

Question 12

S corporations face the same restrictions as partnerships and C corporations on using the cash method of accounting.

Question 13

Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.

Question 14

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

Question 15

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

Question 16

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Question 17

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

Question 18

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

Question 19

Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.

Question 20

Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations.

Question 21

An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax.

Question 22

S corporation losses allocated to a shareholder that are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization.

Question 23

An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

Question 24

Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

Question 25

As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

Question 26

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is governed by rules very similar to the rules for partnerships.

Question 27

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

Question 28

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc., will continue to use a June 30 year-end as an S corporation.

Question 29

S corporations are not entitled to a dividends received deduction.

Question 30

An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.

Question 31

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

Question 32

Distributions to owners may not cause the AAA to go negative or to become more negative.

Question 33

For an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules.

Question 34

Unlike in partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

Question 35

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

Question 36

When an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

Question 37

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

Question 38

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

Question 39

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder is governed by rules very similar to the rules for partnerships.

Question 40

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

Question 41

S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

Question 42

The estimated tax payment rules for S corporations generally follow the rules for C corporations.

Question 43

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

A) January 1, 2019.
B) March 18, 2019.
C) January 1, 2020.
D) March 16, 2020.
E) None of the choices are correct.

Question 44

Which of the following is a requirement to be an S corporation?

A) be a domestic or foreign corporation.
B) have only one class of stock.
C) have fewer than 75 shareholders.
D) have at least one corporate shareholder.
E) none of the choices are correct.

Question 45

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

Question 46

During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

Question 47

Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

Question 48

Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

A) brother.
B) great-grandparent.
C) grandchild.
D) grandparent.
E) none of the choices are correct.

Question 49

Suppose a calendar-year C corporation, NewCorp., Inc., was formed on January 1, 2019, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Inc., a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2019. When is the S election effective?

A) January 1, 2019.
B) April 14, 2019.
C) January 1, 2020.
D) April 14, 2020.
E) Never.

Question 50

S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the 15th day of the fourth month after the S corporation's year-end.

Question 51

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original 90 shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and two close friends. According to the S corporation shareholder limit rules, how many shareholders does 2hit, Inc., have?

A) 90.
B) 92.
C) 95.
D) 97.
E) None of the choices are correct.

Question 52

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

A) January 1, 2019.
B) February 10, 2019.
C) January 1, 2020.
D) February 10, 2020.
E) None of the choices are correct.

Question 53

When an S corporation distributes appreciated property to all of its shareholders pro rata, the shareholders who receive the distributed property recognize income on their distributive share of the deemed gain.

Question 54

The built-in gains tax does not apply to S corporations that never operated as C corporations.

Question 55

Which of the following is prohibited from being an S corporation shareholder?

A) Foreign citizens that are U.S. residents.
B) U.S. citizens.
C) C corporations.
D) 51 unrelated individuals.
E) None of the choices are correct.

Question 56

J.D. formed Clampett, Inc., as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2019, Jethro, Inc., sold all its shares to Jane Hathaway. On February 28, 2019, Clampett, Inc., filed an S corporation election, with J.D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?

A) January 1, 2019.
B) January 1, 2020.
C) January 1, 2021.
D) February 28, 2020.
E) Never.

Question 57

Which of the following would not result in an S election termination?

A) Having 120 unrelated shareholders.
B) Having a C corporation as a shareholder.
C) Issuing a second class of stock.
D) Having excess passive investment income for two consecutive years.
E) None of the choices are correct.

Question 58

S corporations are required to recognize both gains and losses on nonliquidating distributions of property to shareholders.

Question 59

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

Question 60

S corporation distributions of cash are not taxable to the shareholder to the extent of the combined stock and debt basis of the shareholder.

Question 61

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2019, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. How much income does Jamaal report in 2019 from these transactions?

A) $0.
B) $4,000.
C) $6,000.
D) $7,000.
E) None of the choices are correct.

Question 62

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation?

A) $10,000.
B) $27,000.
C) $37,000.
D) $40,000.
E) None of the choices are correct.

Question 63

Assume Joe Harry sells his 25 percent interest in Joe's S Corp., Inc., to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp., Inc., earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $29,000.
B) $50,000.
C) $112,000.
D) $200,000.
E) None of the choices are correct.

Question 64

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Inc., stock after formation?

A) $20,000.
B) $30,000.
C) $60,000.
D) $80,000.
E) $120,000.

Question 65

Which of the following is not a true statement?

A) For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees.
B) For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the shareholder-employees who own more than 2 percent.
C) S corporation owners have a tax incentive to pay themselves a low salary.
D) An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes.
E) None of the choices are false.

Question 66

Clampett, Inc. (an S corporation) previously operated as a C corporation. Under general rules, distributions from Clampett, Inc., are deemed to be paid in the following order:

A) Shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account.
B) Shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit.
C) Prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis.
D) The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis.
E) None of the choices are correct.

Question 67

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

A) Increase for any contributions to the S corporation during the year.
B) Increase for shareholder's share of ordinary business income.
C) Decrease for shareholder's share of nondeductible items.
D) Increase for distributions during the year.
E) None of the choices are correct.

Question 68

The IRS may consent to an early reelection of S corporation status after a termination under which of the following?

A) The corporation is now owned more than 10 percent by shareholders who were not owners at the time of termination.
B) The corporation is now owned more than 60 percent by shareholders who were owners at the time of termination.
C) The termination was not reasonably within the control of the corporation or shareholders with a substantial interest in the corporation and was not part of a planned termination by the corporation or shareholders.
D) The corporation had only two ineligible shareholders at the termination date.
E) None of the choices are correct.

Question 69

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2019?

A) $0 stock basis; $4,600 debt basis.
B) $0 stock basis; $9,600 debt basis.
C) $4,600 stock basis; $0 debt basis.
D) $9,600 stock basis; $0 debt basis.
E) None of the choices are correct.

Question 70

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc., in 2020?

A) $60,000.
B) $50,000.
C) $20,000.
D) $10,000.
E) None of the choices are correct.

Question 71

On March 15, 2019, J.D. sold his Clampett, Inc. (an S corporation) shares to Ellie Mae, Inc. (a C corporation), terminating Clampett, Inc.'s S election on March 15, 2019. Absent permission from the IRS, what is the earliest date Clampett, Inc., may again elect to be taxed as an S corporation?

A) January 1, 2025.
B) January 1, 2024.
C) January 1, 2023.
D) January 1, 2022.
E) January 1, 2020.

Question 72

Assume Joe Harry sells his 25 percent interest in Joe's S Corp., Inc., to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp., Inc., earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $50,000.
B) $200,000.
C) $28,000.
D) $112,000.
E) None of the choices are correct.

Question 73

Suppose Clampett, Inc., terminated its S election on August 28, 2019. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2020, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 20. How much loss may J.D. deduct in 2020?

A) $0.
B) $5,000.
C) $17,000.
D) $20,000.
E) None of the choices are correct.

Question 74

Which of the following is the correct order in which loss limitation rules are applied?

A) Basis rules first, at-risk rules second, passive loss rules third.
B) Passive loss rules first, at-risk rules second, basis rules third.
C) Basis rules first, passive loss rules second, at-risk rules third.
D) Passive loss rules first, basis rules second, at-risk rules third.
E) None of the choices are correct.

Question 75

Which of the following is not a separately stated item for S corporations?

A) Dividends.
B) Interest income.
C) Charitable contributions.
D) Investment interest expense.
E) All of the choices are separately stated items.

Question 76

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2019, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

A) $0 stock basis; $8,000 debt basis.
B) $0 stock basis; $10,000 debt basis.
C) $5,000 stock basis; $10,000 debt basis.
D) $5,000 stock basis; $3,000 debt basis.
E) None of the choices are correct.

Question 77

Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?

A) Passive income.
B) Investment interest income.
C) Dividends.
D) Short-term capital gains.
E) All of these choices are considered investment income for the net investment income tax.

Question 78

Suppose Clampett, Inc., terminated its S election on August 28, 2019. At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000. In 2020, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5. How much loss may J.D. deduct in 2020?

A) $0.
B) $5,000.
C) $17,000.
D) $20,000.
E) None of the choices are correct.

Question 79

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50 percent shareholder of the S corporation?

A) $27,000 stock basis; $10,000 debt basis.
B) $0 stock basis; $10,000 debt basis.
C) $67,000 stock basis; $10,000 debt basis.
D) ($13,000) stock basis; $10,000 debt basis.
E) None of the choices are correct.

Question 80

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

A) $4,000 income.
B) $1,600 income.
C) $1,000 loss.
D) $3,400 loss.
E) None of the choices are correct.