Deck 22: S Corporations

Question 1

Most limited liability partnerships can own stock in an S corporation.

Answer 1

False

Question 2

S corporation status allows shareholders to realize tax benefits from corporate losses immediately (assuming sufficient stock basis).

Answer 2

True

Question 3

A newly formed S corporation does not receive any tax benefit from a C corporation's NOL incurred in its first election tax year.

Answer 3

False

Question 4

A corporation can revoke its S election as of a future date.

Question 5

A former spouse is treated as being in the same family as the individual to whom he or she was married for purposes of determining the number of S corporation shareholders.

Question 6

If a resident alien shareholder moves outside the United States, the S election is terminated.

Question 7

A distribution from the other adjustment account (OAA) is not taxable to an S shareholder.

Question 8

Tax-exempt income at the S corporation level flows through as taxable income to the shareholder.

Question 9

The AAA begins with a zero balance on the first day of an S corporation's first tax year.

Question 10

Where the S corporation rules are silent, C corporation provisions apply.

Question 11

An S election is made on the shareholder's Form 2553.

Question 12

Liabilities affect the owner's basis differently in an S corporation than they do in a partnership.

Question 13

An S election made before becoming a corporation is valid only beginning with the first 12-month tax year.

Question 14

A one-person LLC can be a shareholder of an S corporation.

Question 15

An estate may be a shareholder of an S corporation.

Question 16

A corporation may alternate between S corporation and C corporation status each year depending on which results in more tax savings.

Question 17

Distributions of appreciated property by an S corporation are not taxable to the entity.

Question 18

An S corporation cannot incur a tax liability at the corporation level.

Question 19

An S corporation's AAA can have a negative balance.

Question 20

NOL carryforwards from C years can be used in an S corporation year against ordinary income.

Question 21

Persons who were S shareholders during any part of the year before the election date but were not shareholders when the election was made also must consent to an S election.

Question 22

An S corporation shareholder's stock basis includes his or her direct investments plus a ratable share of any corporate liabilities.

Question 23

An item such as tax-exempt interest that appears in the Other Adjustments Account affects stock basis, but not
AAA.

Question 24

Any distribution of cash or property by a corporation that does not exceed the balance of AAA with respect to S stock during a post-termination transition period of approximately one year is applied against and reduces the basis of the S stock.

Question 25

The termination of an S election occurs on the day after a corporation ceases to be a qualifying S corporation.

Question 26

Tax-exempt income at the corporate level flows through as exempt income to S shareholders.

Question 27

Pass-through S corporation losses can reduce the basis in a shareholder's loan to the entity, but distributions do not reduce loan basis.

Question 28

A capital loss allocated to a shareholder always reduces the Other Adjustments Account.

Question 29

An S shareholder's basis is decreased by distributions treated as being paid from AAA.

Question 30

Only 51% of the shareholders must consent to an S election.

Question 31

An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions.

Question 32

An S corporation does not recognize a loss when distributing assets that are worth less than their basis.

Question 33

An S shareholder's basis is increased by stock purchases and capital contributions.

Question 34

An S shareholder's stock basis can be reduced below zero.

Question 35

When loss assets are distributed by an S corporation, a shareholder's basis is equal to the asset's fair market value.

Question 36

Depreciation recapture income is a Schedule K item on the Form 1120S.

Question 37

The Section 179 expense deduction is a Schedule K item on the Form 1120S.

Question 38

The passive investment income of an S corporation includes gains from the sale of securities.

Question 39

The final individual tax return of an S shareholder who dies during the S corporation tax year must report his or her share of the pro rata income (loss) items up to the date of death.

Question 40

A per-day, per-share allocation of flow-through S corporation items must be used.

Question 41

There are no advantages for an S corporation to issue § 1244 stock.

Question 42

The passive investment income of an S corporation includes net capital gains from the sale of stocks and securities.

Question 43

The corporate-level tax on recognized built-in gains applies when an S corporation disposes of an asset in a taxable disposition within five years after the date on which the S election took effect.

Question 44

Which statement is incorrect with respect to the number-of-shareholders test in filing an S election?

A) Husband Jaime and wife Maria count as one shareholder.
B) Grandmother Adela and granddaughter Maria count as one shareholder.
C) Husband Jaime and the estate of wife Maria count as one shareholder.
D) Husband Jaime and ex-wife Isabel count as one shareholder.
E) All of these statements are correct.

Question 45

Which corporation is eligible to make the S election?

A) Non-U.S. corporation.
B) One-person limited liability company.
C) Insurance company.
D) U.S. bank.
E) None of these.

Question 46

An S corporation is subject to the following tax(es).

A) Corporate income tax.
B) Built-in gains tax.
C) Alternative minimum tax.
D) None of these.

Question 47

The maximum number of actual shareholders in an S corporation is:

A) 75.
B) 100.
C) 200.
D) Some other number.
E) Unlimited.

Question 48

Identify a disadvantage of being an S corporation.

A) Estates can be shareholders.
B) Losses flow through immediately to the shareholders.
C) Section 1202 treatment (qualified small business stock) is not available.
D) Tax-exempt income flows through as excludible to shareholders.
E) All of these are advantages of the S election.

Question 49

An S shareholder's stock basis does not include a ratable share of S corporation liabilities.

Question 50

Which statement is incorrect?

A) S corporations are treated as corporations under state law.
B) S corporations are treated as partnerships for Federal income tax purposes.
C) Distributions of appreciated property are taxable to the S corporation.
D) All of these.

Question 51

Compensation for services rendered to an S corporation generates a corporate-level FICA tax liability.

Question 52

Which of the following, if any, are eligible shareholders of an S corporation?

A) A partnership.
B) A nonresident alien.
C) A three-person LLC.
D) The estate of a deceased shareholder.
E) None of these.

Question 53

The LIFO recapture tax is a variation of the passive investment income penalty tax.

Question 54

An S corporation must possess which of the following characteristics?

A) Not more than 100 shareholders.
B) Corporation organized in the United States.
C) Only one class of stock.
D) All of these.
E) None of these.

Question 55

A service-type S corporation shareholder cannot claim the 20% QBI deduction.

Question 56

Several individuals acquire assets on behalf of Skip Corporation on May 28, purchased assets on June 3 and began business on June 11. They subscribe to shares of stock, file articles of incorporation for Skip, and become shareholders on June 21. The S election must be filed no later than two and one-half months after:

A) May 28.
B) June 3.
C) June 11.
D) June 21.
E) December 31.

Question 57

Which of the following, if any, can be eligible shareholders of an S corporation?

A) A Roth IRA.
B) A partnership.
C) A non-U.S. corporation.
D) A nonqualifying trust.
E) None of these.

Question 58

Which statement is incorrect with respect to filing an S election?

A) Form 2553 must be filed.
B) All shareholders must consent.
C) The election may be filed in the previous year.
D) An extension of time is available for filing Form 2553.
E) All of these are correct.

Question 59

An S corporation can claim a deduction for its operating loss amounts.

Question 60

The exclusion of gain on disposition of small business stock is not available on disposition of S corporation stock.

Question 61

Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is $20,000, the corporation distributes appreciated property worth $100,000 (basis of $20,000). Fred's taxable gain is:

A) $-0-.
B) $10,000.
C) $80,000.
D) $100,000.

Question 62

What method is used to allocate S corporation income or losses (unless an election to the contrary is made)?

A) Any method agreed to by all of the shareholders.
B) Per-day allocation.
C) FIFO method.
D) LIFO method.

Question 63

Amit, Inc., an S corporation, holds an AAA balance of $614,000 at the beginning of the tax year. During the year, the following items occur. $$\begin{array} { l r } \text { Operating income } & \$ 501,000 \\\text { Interest income } & 6,500 \\\text { Dividend income } & 13,020 \\\text { Municipal bond interest income } & 6,000 \\\text { Long-term capital loss from sale of investment land } & 7,400 \\\text { Section 179 depreciation deduction } & 6,000 \\\text { Charitable contributions } & 19,000 \\\text { Cash distributions } & 57,000\end{array}$$ Amit's ending AAA balance is:

A) $1,055,620.
B) $1,185,150.
C) $1,191,150.
D) $1,242,150.
E) Some other amount.

Question 64

Which of the following items, if any, decreases an S corporation's AAA?

A) Section 1231 loss.
B) Expenses related to tax-exempt income.
C) Depletion in excess of basis.
D) Distribution from earnings and profits.

Question 65

On January 2, 2019, David loans his S corporation $10,000. By the end of 2019 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2020, the company's operating income is $10,000. The company makes 2020 distributions to David of $11,000. David reports a(n):

A) $1,000 LTCG.
B) $3,000 LTCG.
C) $11,000 LTCG.
D) Loan basis of $10,000.

Question 66

You are given the following facts about a 50% owner of an S corporation. Compute her ending stock basis. $$\begin{array} { l r } \text { Increase in AAA } & \$ 32,000 \\\text { Increase in OAA } & 6,300 \\\text { Payroll tax penalty } & 2,140 \\\text { Owner's beginning stock basis } & 39,800 \\\text { Tax-exempt interest income } & 4,800 \\\text { Insurance premiums paid (nondeductible) } & 2,700 \\\text { Owner's additional stock purchases } & 22,000 \\\text { Owner's 20\% QBI deduction } & 21,000\end{array}$$

A) $80,950.
B) $85,750.
C) $100,100.
D) $106,225.

Question 67

During the year, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. At the end of last year, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct?

A) Nutt recognizes a $1,000 LTCG.
B) Nutt's stock basis is $2,000.
C) Nutt's ordinary income is $15,000.
D) Nutt's tax-free return of capital is $11,000.

Question 68

You are given the following facts about a 40% owner of an S corporation. Calculate her ending stock basis. $\begin{array}{lr}\text { Owner's beginning stock basis } & \$ 36,800 \\\text { Increase in AAA. } & 32,000 \\\text { Increase in OAA } & 6,300 \\\text { Payroll tax penalty } & 2,140 \\\text { Tax-exempt interest income } & 4,800 \\\text { Life insurance premiums paid } & 2,700\\\text { (nondeductible) }\\\end{array}$

A) $71,600
B) $74,120
C) $76,220
D) $78,920

Question 69

Which statement is incorrect with respect to an S shareholder's consent?

A) Both husband and wife must consent if one owns the stock as community property.
B) An S election requires a consent from all of the S corporation's shareholders.
C) A consent must be in writing.
D) All of these statements are correct.

Question 70

Samantha owned 1,000 shares in Evita, Inc., an S corporation, that uses the calendar year. On October 11, Samantha sells all of her Evita stock. Her stock basis at the beginning of the tax year was $60,000. Evita's ordinary income for the year was $22,000 through the date of sale, and Samantha receives a distribution of $35,000 on May 3rd. Her stock basis at the time of the sale is:

A) $117,000.
B) $82,000.
C) $60,000.
D) $47,000.

Question 71

Which of the following reduces a shareholder's S corporation stock basis?

A) Depletion deductions in excess of the basis of property.
B) Illegal kickbacks paid.
C) Nontaxable income.
D) Sales income.
E) A 20% QBI deduction.

Question 72

Which transaction affects the Other Adjustments Account on an S corporation's Schedule M-2?

A) Payroll penalty.
B) Unreasonable compensation.
C) Life insurance proceeds (nontaxable to the recipient S corporation).
D) Taxable interest.

Question 73

If an S corporation's beginning balance in OAA is zero and the following transactions occur, what is the ending OAA balance? $\begin{array}{lr}\text { Depreciation recapture income } & \$ 21,000 \\\text { Payroll tax penalty } & 4,200 \\\text { Tax -ex empt interest income } & 5,300 \\\text { Nontax able life insurance proceeds } & 5,100 \\\text { Life insurance premiums paid (nondeductible) } & 2,800\end{array}$

A) $1,300
B) $7,600
C) $23,300
D) $27,500
E) None of these

Question 74

Kinney, Inc., an electing S corporation, holds $5,000 of AEP and $9,000 in AAA at the beginning of the calendar tax year. Kinney has two shareholders, Eric and Maria, each of whom owns 500 shares of Kinney's stock. Kinney's taxable income is $6,000 for the year. Kinney distributes $6,000 to each shareholder on February 1, and it distributes another $3,000 to each shareholder on September 1. How is Eric taxed on the distribution?

A) $500 dividend income.
B) $1,000 dividend income.
C) $1,500 dividend income.
D) $3,000 dividend income.

Question 75

Which item does not appear on Schedule K of Form 1120S?

A) Intangible drilling costs.
B) Foreign loss.
C) Utilities expense.
D) Recovery of a tax benefit.
E) All of these items appear on Schedule K.

Question 76

A new S corporation shareholder can revoke the S election unilaterally, if he or she owns how much of the existing S corporation's stock?

A) More than 50%.
B) 50% or more.
C) The election can be revoked only if all of the shareholders consent.
D) The election cannot be revoked during the first year of the new shareholder's ownership.

Question 77

Which item is not included in an S corporation's nonseparately computed income?

A) Net sales.
B) Cost of goods sold.
C) Dividends received.
D) Depreciation recapture.
E) All of these are included in non-separately computed income.

Question 78

You are given the following facts about a solely owned S corporation. What is the shareholder's ending stock basis? $$\begin{array}{l}\begin{array} { l r } \text { Increase in AAA } & \$ 31,000 \\\text { Increase in OAA } & 6,300 \\\text { Payroll tax penalty } & 2,140 \\\text { Beginning stock basis } & 39,800 \\\text { Stock purchases } & 22,000 \\\text { Tax-exempt life insurance proceeds } & 4,800 \\\text { Life insurance premiums paid } & 2,700\end{array}\\\text { (nondeductible) }\end{array}$$

A) $61,800
B) $68,100
C) $99,100
D) $100,100

Question 79

Which item does not appear on Schedule K of Form 1120S?

A) Tax-exempt interest income.
B) Section 1231 gain.
C) Section 179 depreciation deduction.
D) Depreciation recapture income.
E) All of these appear on Schedule K.

Question 80

On January 2, 2019, Tim loans his S corporation $10,000. By the end of 2019, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000. During 2020, the company's operating income is $10,000. The company makes 2020 distributions of $8,000 to Tim. He reports a(n):

A) $2,000 LTCG.
B) $8,000 LTCG.
C) Stock basis of $2,000.
D) Loan basis of $10,000.