Deck 22: S Corporations

Question 1

An S election made before becoming a corporation is valid the next 22-month tax year.

Answer 1

False

Question 2

The alternative minimum tax applies to an S corporation.

Answer 2

False

Question 3

Shareholders may deduct losses in excess of the basis in S corporation stock when shareholder does not have a loan basis.

Answer 3

False

Question 4

Net operating losses incurred before an S election do not flow through to the shareholders once the election is in effect.

Question 5

Persons who were shareholders during any part of the year before the election date,but were not shareholders when the election was made,also must consent to the election for the S election to be effective for the current tax year.

Question 6

Most IRAs can own stock in an S corporation.

Question 7

Distribution of appreciated property is taxable to an S corporation.

Question 8

Charitable contributions are subject to the 10% limitation at the S corporation level.

Question 9

For Federal income tax purposes,taxation of S corporations resembles that of partnerships.

Question 10

The passive loss limitations apply at the S corporation shareholder level.

Question 11

Where the S corporation rules are silent,partnership rules apply to the S corporation.

Question 12

As a general rule,S corporation treatment is not advantageous when the individual tax rate far exceeds the applicable corporate tax rate.

Question 13

A two-or-more member LLC operates under partnership tax principles.

Question 14

For a new corporation,a premature S election may not be effective.

Question 15

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

Question 16

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

Question 17

An S corporation can be a shareholder in another corporation.

Question 18

No maximum or minimum dollar sales or capitalization restrictions apply to S corporations.

Question 19

An S election is made on Form 2550.

Question 20

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

Question 21

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

Question 22

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

Question 23

A distribution from previously taxed income is taxable.

Question 24

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

Question 25

Tax-exempt income is not separately stated on Schedule K of Form 1120S.

Question 26

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

Question 27

A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.

Question 28

A capital loss allocated to a shareholder always reduces the other adjustments account.

Question 29

An S corporation's AAA cannot have a negative balance.

Question 30

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

Question 31

Tax-exempt income at the corporate level does flow through to the shareholders.

Question 32

An S corporation that has total assets of at least $5 million on Schedule L at the end of the tax year must file a Schedule M-3.

Question 33

Passive investment income includes gains from the sale of securities.

Question 34

An S corporation may not amortize organizational expenses.

Question 35

An S corporation with earnings and profits can make a taxable dividend distribution by making a AAA bypass election.

Question 36

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

Question 37

All tax preference items flow through the S corporation,to be included in the shareholders' AMT calculations.

Question 38

The Schedule M-3 is the same for a C corporation and an S corporation.

Question 39

The pro rata method assigns an equal amount of each of the S corporation items (e.g. ,LTCG)to each day of the year.

Question 40

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

Question 41

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

Question 42

Any distribution made by an S corporation during a tax year is taken into account before accounting for the year's losses.

Question 43

An S shareholder's basis in his or her stock can be reduced below zero.

Question 44

Which statement is incorrect?

A)S corporations are treated as corporations under state law.
B)S corporations resemble partnerships under the Federal income tax law.
C)The alternative minimum tax applies to some S corporations.
D)An S corporation may not allocate income and deduction items to specific shareholders,like a partnership does.
E)None of the above.

Question 45

Compensation for services rendered to an S corporation is not subject to FICA taxes.

Question 46

The debt basis always is adjusted back to the original amount before any increase is made in the stock basis.

Question 47

An S corporation may be subject to the following tax.

A)Built-in gains tax.
B)Accumulated earnings tax.
C)Personal holding company tax.
D)Alternative minimum tax.
E)None of the above is paid by S corporations.

Question 48

An S corporation is entitled to a deduction for its NOL carryovers.

Question 49

Which statement is incorrect?

A)S corporation status allows shareholders to realize tax benefits from corporate losses immediately.
B)Shareholder-level tax on corporate profits can be eliminated by a step-up in the basis of the stock upon the shareholders death.
C)Less than 50% of corporations make the S election.
D)An S corporation resembles an LLC for Federal income tax purposes.
E)None of the above.

Question 50

Passive investment income includes net capital gains from the sale of stocks and securities.

Question 51

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

Question 52

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

Question 53

Form 1120S provides a shareholder's computation of his or her stock basis.

Question 54

The carryover period for the NOLs of a C corporation continues to run during S corporation years.

Question 55

The § 1374 tax is a corporate-level tax on any built-in gain recognized in 2010 when an S corporation disposes of an asset in a taxable disposition within 7 tax years after the date on which the S election took effect.

Question 56

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

Question 57

It is not beneficial for an S corporation to issue § 1244 stock.

Question 58

Any losses that are suspended under the at-risk rules are carried forward and are available during an S corporation's post-termination period.

Question 59

Any excess of S corporation losses or deductions over the shareholder's combined stock and debt basis is suspended until there is a subsequent stock or debt basis.

Question 60

The § 1202 exclusion of gain on disposition of S corporation stock is not available.

Question 61

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

A)A resident alien.
B)Partnership.
C)A foreign corporation.
D)A nonqualifying trust.
E)None of the above can own stock.

Question 62

The maximum number of S shareholders is:

A)75.
B)100.
C)200.
D)Indeterminable.
E)Some other amount.

Question 63

On January 1,2010,Kinney,Inc. ,an electing S corporation,has $4,000 of AEP and a balance of $10,000 in AAA.Kinney has two shareholders,Erin and Maine,each of whom owns 500 shares of Kinney's stock.Kinney's 2010 taxable income is $5,000.Kinney distributes $6,000 to each shareholder on February 1,2010,and distributes another $3,000 to each shareholder on September 1.How is Erin taxed on this distribution?

A)$500 dividend income.
B)$1,000 dividend income.
C)$1,500 dividend income.
D)$3,000 dividend income.
E)None of the above.

Question 64

How large must total assets on Schedule L be at the end of the year for an S corporation to be required to file Schedule M-3?

A)$4 million.
B)$5 million.
C)$7.5 million.
D)$10 million.
E)Not required to file.

Question 65

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

A)An S election requires a consent from all of the S corporation's shareholders.
B)Both husband and wife must consent if one owns the stock as community property.
C)A consent extension is available only if Form 2553 is filed on a timely basis,reasonable cause is given,and the interests of the government are not jeopardized.
D)A consent must be in writing.
E)None of the above statements is incorrect.

Question 66

Which type of distribution from an S corporation is taxed at the 0/15% rate?

A)AAA.
B)PTI.
C)OAA.
D)AEP.
E)None of the above.

Question 67

What statement is correct with respect to an S corporation?

A)There is no advantage also to elect § 1244 stock.
B)An S corporation can own 85% of an insurance company.
C)An estate may be a shareholder.
D)A voting trust arrangement is not available.
E)None of the above statements is true.

Question 68

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

A)Taxable dividends.
B)Stock dividend (taxable).
C)Section 1250 gain.
D)Tax-exempt income.
E)None of the above.

Question 69

Which corporation is eligible to make the S election?

A)Foreign corporation.
B)100% owned corporation.
C)An insurance company.
D)A U.S.bank.
E)None of the above can elect S status.

Question 70

Several individuals acquire assets on behalf of Skip Corporation on May 28,2010,purchased assets on June 3,2010,and begin doing business on June 11,2010.They subscribe to shares of stock,file articles of incorporation for Skip,and become shareholders on June 21,2010.The S election must be filed no later than 2 1/2 months after:

A)May 28,2010.
B)June 3,2010.
C)June 11,2010.
D)June 21,2010.
E)December 31,2010.

Question 71

Beginning in 2010,the AAA of Amit,Inc. ,an S corporation,has a balance of $725,000.During the year,the following items occur. Amit's ending AAA balance is:

A)$1,153,150.
B)$1,134,150.
C)$1,127,650.
D)$1,126,750.

Question 72

Distributions of which assets during an S corporation's post-termination period receive favorable income tax treatment?

A)Cash.
B)Automobile.
C)Real estate.
D)Notes receivable.
E)All of the above.

Question 73

Identify a disadvantage of an S corporation.

A)Generally,trusts cannot be shareholders.
B)Losses flow through to the shareholders.
C)The AMT on corporations is avoided.
D)Tax-exempt income flows through to the shareholders.
E)None of the above is a disadvantage of the S election.

Question 74

Which statement is incorrect with respect to filing for 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)None of the above are incorrect.

Question 75

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

A)A child,age 10.
B)A resident alien.
C)A voting trust.
D)An estate of a deceased shareholder.
E)All of the above can own stock.

Question 76

Which statement is incorrect about an S corporation?

A)Nonresident alien cannot own S stock.
B)A one-person LLC classified as a disregarded entity can be a shareholder.
C)A partnership can own S corporation stock.
D)An S corporation can be a partner in a partnership.
E)None of the above.

Question 77

During 2010,Shirley Nutt,the sole shareholder of a calendar year S corporation,received a distribution of $16,000.On December 31,2009,her 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 will be $2,000.
C)Nutt's ordinary income is $15,000.
D)Nutt's return of capital is $11,000.
E)None of the above.

Question 78

If the beginning balance in OAA is $3,900,and the following transactions occur,what is the ending OAA balance?

A)$1,100.
B)$6,400.
C)$53,600.
D)$56,400.
E)None of the above.

Question 79

Which equity arrangement would stop a corporation from being an S corporation?

A)Phantom stock.
B)Stock appreciation rights.
C)Warrants.
D)Straight debt.
E)An insurance company structure.

Question 80

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

A)Charitable contributions.
B)Unreasonable compensation.
C)Payroll tax penalty assessed.
D)Section 1245 income.
E)None of the above.