Question 1

Which, if any, of the following items has no effect on the stock basis of an S corporation shareholder?

Accepted Answer

All of the items listed (operating income, long-term capital gain, cost of goods sold, and short-term capital loss) affect the stock basis of an S corporation shareholder. Operating income and capital gains increase the basis, while losses decrease it. Cost of goods sold impacts the corporation's income, thereby affecting the shareholder's stock basis indirectly through its effect on the corporation's overall profitability.

Question 2

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?

Accepted Answer

The answer of Kinney, Inc., an electing S corporation, holds...

Question 3

A calendar year C corporation reports a $41,000 NOL in 2017, but it elects S status for 2018 and generates an NOL of $30,000 in that year.At all times during 2018, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10% of the stock.Kris, one of the 10 shareholders, holds an S stock basis of $2,300 at the beginning of 2018.How much of the 2018 loss, if any, is deductible by Kris?

Accepted Answer

Kris can deduct up to the amount of their stock basis in the S corporation, which is $2,300. S corporation losses are passed through to shareholders and can only be deducted to the extent of the shareholder's basis in the stock and any debt of the corporation to the shareholder. Since Kris's basis is $2,300, that is the maximum amount they can deduct.

Question 4

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

Accepted Answer

The ending stock basis is calculated by taking the beginning stock basis, adding stock purchases, increases in AAA and OAA, and tax-exempt income, then subtracting nondeductible expenses. Calculation: $39,800 + $22,000 + $31,000 + $6,300 + $4,800 - $2,700 = $99,100.

Question 5

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

Accepted Answer

The Other Adjustments Account (OAA) is increased by tax-exempt income and decreased by related expenses. The tax-exempt interest income ($5,300) and nontaxable life insurance proceeds ($5,100) increase the OAA, while the nondeductible life insurance premiums ($2,800) decrease it. Thus, the ending OAA balance is $5,300 + $5,100 - $2,800 = $7,600.

Question 6

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

Accepted Answer

Life insurance proceeds that are nontaxable to the recipient S corporation affect the Other Adjustments Account on an S corporation's Schedule M-2, as they increase the corporation's AAA (Accumulated Adjustments Account) without affecting its taxable income.

Question 7

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

Accepted Answer

Unless an election to the contrary is made, S corporation income or losses are allocated to each shareholder on a per-day basis. This means that a shareholder's percentage of ownership in the corporation for each day of the year is multiplied by the corporation's income or loss for that year to determine the shareholder's share of the corporation's income or loss for that year. Other methods may be agreed upon by all shareholders, but per-day allocation is the default method.

Question 8

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, and she receives a distribution of $35,000 on May 3rd.Her stock basis at the time of the sale is:

Accepted Answer

Samantha's stock basis is decreased by any distributions she receives and increased by her share of the S corporation's income or losses.

At the beginning of the tax year, her stock basis was $60,000. She received a distribution of $35,000 on May 3rd, so her stock basis would be reduced to $60,000 - $35,000 = $25,000.

Her share of the S corporation's income for the year would be $22,000, so her stock basis would be increased to $25,000 + $22,000 = $47,000.

Therefore, her stock basis at the time of the sale is $47,000.

Question 9

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. $\begin{array}{lr}
\text { Operating income } & \$ 501,000 \
\text { Interest income } & 6,500 \
\text { Dividend income } & 13,020 \
\text { Municipal bond interest income } & 6,000 \
\text { Long-term capital loss from sale of investment land } & 7,400 \
\text { Section } 179 \text { depreciation deduction } & 6,000 \
\text { Charitable contributions } & 19,000 \
\text { Cash distributions } & 57,000
\end{array}$ ? Amit's ending AAA balance is:

Accepted Answer

The Accumulated Adjustments Account (AAA) for an S corporation is adjusted by various items of income and deduction. Starting with an AAA balance of $614,000, we add operating income ($501,000), interest income ($6,500), and dividend income ($13,020). Municipal bond interest income ($6,000) is tax-exempt and does not affect the AAA. The long-term capital loss ($7,400) and Section 179 depreciation deduction ($6,000) are subtracted. Charitable contributions ($19,000) are also subtracted. Cash distributions do not directly affect the AAA balance. Therefore, the ending AAA balance is calculated as follows: $614,000 + $501,000 + $6,500 + $13,020 - $7,400 - $6,000 - $19,000 = $1,102,120.

Question 10

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?

Accepted Answer

The answer of During the year, Miles Nutt, the sole...

Question 11

On January 1, Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The entity incurs a $60,000 loss for a non-leap year.On the 200th day of the year (not a leap year), Bobby sells his one-half of the stock to his son, Saul.How much of the $60,000 loss, if any, is allocated to Bobby?

Accepted Answer

Under the rules for S corporations, losses are passed through to shareholders based on their pro rata share of ownership during the year the loss is incurred.

For the first 200 days of the year, Bobby and Alice each own 50% of the stock, so they will each be allocated 50% of the $60,000 loss, or $30,000.

However, on the 200th day of the year, Bobby sells his half of the stock to his son Saul. This means that Bobby will only be allocated the loss for the portion of the year that he owned the stock.

There are 365 days in a non-leap year, so Bobby owned his share for 200/365 or approximately 54.8% of the year. This means that he will be allocated 54.8% of the $30,000 loss, or approximately $16,438.

Therefore, the correct answer is C) $16,438.

Question 12

You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis. $$\begin{array} { l r } 
\text { Owner's beginning stock basis } & \$ 36,800 \
\text { Increase in AAA } & 32,000 \
\text { Increase in OAA } & 6,300 \
\text { Payroll tax penalty } & 2,140 \
\text { Tax-exempt interest income } & 4,800 \
\text { Life insurance premiums paid } & 2,700 \
\text { (nondeductible) } & \
\text { Owner's purchases of additional stock } & 22,000
\end{array}$$ ?

Accepted Answer

The answer of You are given the following facts about...

Question 13

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

Accepted Answer

The answer of Which, if any, of the following items...

Question 14

Oxen Corporation incurs the following transactions. $$\begin{array} { l r } 
\text { Net income from operations } & \$ 100,000 \
\text { Interest income from savings account } & 3,000 \
\text { Long-term capital gain from sale of securities } & 10,000 \
\text { Short-term capital loss from sale of securities } & 4,000
\end{array}$$ ? Oxen maintains a valid S election and does not distribute any assets (cash or property) to its sole shareholder, Megan.As a result, Megan must recognize:

Accepted Answer

As an S corporation, Oxen's income and losses pass through to Megan. She recognizes $103,000 as ordinary income ($100,000 net income + $3,000 interest), a $10,000 long-term capital gain, and a $4,000 short-term capital loss.

Question 15

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

Accepted Answer

To compute the ending stock basis for the 50% owner of an S corporation, you start with the owner's beginning stock basis and adjust it for various increases and decreases. Here's how:1. **Beginning stock basis:** $39,8002. **Add Increase in AAA (Accumulated Adjustments Account):** $32,0003. **Add Increase in OAA (Other Adjustments Account):** $6,3004. **Add Tax-exempt interest income:** $4,8005. **Add Owner's additional stock purchases:** $22,000The payroll tax penalty and insurance premiums paid are not added to the stock basis because they are not income items or capital contributions. They are either nondeductible expenses or penalties.So, the calculation is as follows:$$39,800 + 32,000 + 6,300 + 4,800 + 22,000 = 104,900$$However, none of the provided options match this calculation directly. Given the options and the typical adjustments for an S corporation shareholder's stock basis, it seems there might have been a mistake in the calculation or interpretation of the options. Based on the standard approach to calculating ending stock basis with the given information, none of the options directly match the expected outcome. If we strictly follow the calculation provided, there seems to be a discrepancy with the options given. Given the context and the usual adjustments for an S corporation shareholder's stock basis, the correct approach involves adding the beginning stock basis, increases in AAA, increases in OAA, tax-exempt interest income, and the owner's additional stock purchases. However, without adjustments or corrections to the provided options or additional specific instructions on handling each item, a direct match to the options is challenging to justify. Re-evaluating the calculation and considering typical adjustments:- Starting with the beginning stock basis: $39,800- Adding the increase in AAA: $32,000- Adding the increase in OAA: $6,300- Including the tax-exempt interest income (since it increases the basis): $4,800- Including the owner's additional stock purchases: $22,000This leads to a recalculated total that should be considered against the options provided. However, given the initial calculation and standard considerations, there seems to be a misunderstanding or misapplication regarding the options provided (A, B, C, D) and the calculation process outlined. Therefore, based on the standard approach and the information given, a direct and accurate selection from the provided options (A, B, C, D) is challenging without further clarification or correction either in the calculation approach or the interpretation of the provided options.

Question 16

On January 2, 2016, David loans his S corporation $10,000.By the end of 2016 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2017, the company's operating income is $10,000.The company makes 2017 distributions to David of $11,000.David reports a(n):

Accepted Answer

David reports a $1,000 long-term capital gain (LTCG) because the distribution exceeds his stock and debt basis. His stock basis is zero, and his debt basis is $8,000 after the loan reduction. The $10,000 operating income increases his stock basis to $10,000 (not affecting his loan basis). The $11,000 distribution reduces his stock basis back to zero and his loan basis by $1,000 (from $8,000 to $7,000), resulting in a $1,000 LTCG.

Question 17

On January 2, 2016, Tim loans his S corporation $10,000.By the end of 2016, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000.During 2017, the company's operating income is $10,000.The company makes 2017 distributions to Tim of $8,000.Tim reports a(n):

Accepted Answer

The answer of On January 2, 2016, Tim loans his...

Question 18

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:

Accepted Answer

When an S corporation distributes appreciated property to a shareholder, the shareholder's taxable gain is the excess of the fair market value of the property over the shareholder's stock basis. In this case, the appreciated property is worth $100,000, and Fred's stock basis is $20,000, so his taxable gain is $80,000 (Option C).

Question 19

Which item has no effect on an S corporation's AAA?

Accepted Answer

Stock purchases by a shareholder do not affect an S corporation's Accumulated Adjustments Account (AAA) because AAA is impacted by items that affect the corporation's income, deductions, and distributions, not by changes in the ownership of its stock.

Question 20

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

Accepted Answer

The answer of Which of the following reduces a shareholder's...

Quiz 15: S Corporations

Which, if any, of the following items has no effect on the stock basis of an S corporation shareholder?

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

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

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?

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

On January 2, 2016, David loans his S corporation $10,000.By the end of 2016 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2017, the company's operating income is $10,000.The company makes 2017 distributions to David of $11,000.David reports a(n) :

On January 2, 2016, Tim loans his S corporation $10,000.By the end of 2016, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000.During 2017, the company's operating income is $10,000.The company makes 2017 distributions to Tim of $8,000.Tim reports a(n) :

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:

Which item has no effect on an S corporation's AAA?

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