Deck 22: S Corporations

Question 1

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

Answer 1

False

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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 5

An S corporation may be voluntarily or involuntarily terminated.

Question 6

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

Question 7

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 8

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

Question 9

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.

Question 10

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

Question 11

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 12

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

Question 13

To make an S election effective as of the beginning of the current year, an S corporation must file Form 2553 within 3½ months after the beginning of the year.

Question 14

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

Question 15

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 16

Like partnerships and C corporations, S corporations face several restrictions on using the cash method of accounting.

Question 17

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.

Question 18

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

Question 19

Publicly traded corporations cannot be treated as S corporations.

Question 20

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

Question 21

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 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

S corporations are not entitled to a dividends received deduction.

Question 28

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 29

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

Question 30

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

Question 31

Losses not deductible due to the basis rules are carried over to future years.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

An S corporation shareholder's allocable share of business income that is a passive activity is considered net investment income for purposes of the Net Investment Income tax.

Question 39

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

Question 40

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

Question 41

If Annie and Andy (each a 30% shareholder) file a revocation on March 18, 2014 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, 2014.
B) March 16, 2014.
C) January 1, 2015.
D) March 16, 2015.
E) None of these.

Question 42

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety 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 2 close friends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have?

A) 90.
B) 92.
C) 95.
D) 97.
E) None of these.

Question 43

Suppose Hassell formed a C corporation, NewCorp. Inc., in 2014 with a calendar tax year and made an S election on April 14, 2014 with the consent of NewCorp. Inc.'s shareholders: Hassell, Richie Cunningham, and Arnold's, Inc. (a C corporation). When is the S election effective?

A) January 1, 2014.
B) April 14, 2014.
C) January 1, 2015.
D) April 14, 2015.
E) Never.

Question 44

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

Question 45

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

Question 46

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

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

Question 47

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

Question 48

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

Question 49

If Annie and Andy (each a 30% shareholder) file a revocation on February 10, 2014 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, 2014.
B) February 10, 2014.
C) January 1, 2015.
D) February 10, 2015.
E) None of these.

Question 50

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

Question 51

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

A) brother.
B) great-grandparent.
C) grandchildren.
D) grandparent.
E) None of these.

Question 52

S corporations recognize gains and losses on distributions of property.

Question 53

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

Question 54

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 these.

Question 55

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

Question 56

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) Corporations.
D) 51 unrelated individuals.
E) None of these.

Question 57

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

Question 58

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

Question 59

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

Question 60

The IRS may consent to an early re-election 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 these.

Question 61

Clampett, Inc. (an S corporation) previously operated as a C corporation. 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 these.

Question 62

Suppose at the beginning of 2014, 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 a $5,000 suspended loss from the S corporation. In 2014, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% 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 these.

Question 63

Which of the following S corporations would be subject to the excess net passive income tax?

A) An S corporation that never operated as a C corporation.
B) An S corporation that has previously distributed all earnings and profits from prior C corporation years.
C) An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30% of its gross receipts.
D) An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22% of its gross receipts.
E) None of these.

Question 64

Suppose at the beginning of 2014, 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 2014, 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 these.

Question 65

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 these are separately stated items.

Question 66

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assume the corporate tax rate is 35% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2015 if it had been a C corporation. In 2016, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2015? In 2016?

A) $10,500 in 2015; $0 in 2016.
B) $3,500 in 2015; $0 in 2016.
C) $0 in 2015; $0 in 2016.
D) $0 in 2015; $10,500 in 2016.
E) None of these.

Question 67

Assume Joe Harry sells his 25% 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 28 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $28,000.
B) $50,000.
C) $112,000.
D) $200,000.
E) None of these.

Question 68

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) Interest income.
C) Dividends.
D) Short-term capital gains.
E) All of these are considered investment income for the Net Investment Income tax.

Question 69

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 these.

Question 70

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35% and that Clampett, Inc. had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc. pay in 2015?

A) $10,500.
B) $10,000.
C) $3,500.
D) $0.
E) None of these.

Question 71

Suppose at the beginning of 2014, 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 a $5,000 suspended loss from the S corporation. In 2014, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of 2014?

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 these.

Question 72

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 more-than-2-percent shareholder-employees.
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 these statements is false.

Question 73

Assume Joe Harry sells his 25% 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 28 and a total of $1,460,000 from January 1 through December 31 (365 days)?

A) $28,000.
B) $50,000.
C) $112,000.
D) $200,000.
E) None of these.

Question 74

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). What is Clampett, Inc.'s built-in gain or loss on January 1, 2014?

A) $30,000 net built-in gain.
B) $10,000 net built-in gain.
C) $0 net built-in gain.
D) $20,000 net built-in loss.
E) None of these.

Question 75

Suppose at the beginning of 2014, 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 2014, 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 2014 from these transactions?

A) $0.
B) $4,000.
C) $6,000.
D) $7,000.
E) None of these.

Question 76

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

A) basis rules 1st, at-risk rules 2nd, passive loss rules 3rd.
B) passive loss rules 1st, at-risk rules 2nd, basis rules 3rd.
C) basis rules 1st, passive loss rules 2nd, at-risk rules 3rd.
D) passive loss rules 1st, basis rules 2nd, at-risk rules 3rd.
E) None of these.

Question 77

Clampett, Inc. converted to an S corporation on January 1, 2014. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 35%. How much built-in gains tax does Clampett, Inc. pay in 2015?

A) $10,500.
B) $10,000.
C) $3,500.
D) $0.
E) None of these.

Question 78

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 Cook, Inc. after formation?

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

Question 79

Suppose at the beginning of 2014, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2014, 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% of the S corporation?

A) $10,000.
B) $27,000.
C) $37,000.
D) $40,000.
E) None of these.

Question 80

Suppose at the beginning of 2014, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2014, 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% 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 these.