Question 1

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

C) When an S corporation distributes appreciated property to a shareholder, the shareholder must recognize gain to the extent that the fair market value of the property exceeds the shareholder's basis in the S corporation stock. In this case, Fred's basis in the stock is $20,000, and the fair market value of the property distributed is $100,000, resulting in Fred having to recognize a taxable gain of $80,000 ($100,000 - $20,000).

Question 2

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

Accepted Answer

S corporation income or losses are allocated on a per-day basis throughout the tax year unless an election is made to use a different method. This ensures that each shareholder's share of income, deduction, loss, or credit is calculated based on their ownership percentage for each day of the corporation's tax year.

Question 3

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:

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 as they are separately stated items that do not directly affect the AAA. Cash distributions do not affect the AAA balance but are paid out of it. Therefore, the calculation is $614,000 + $501,000 + $6,500 + $13,020 - $7,400 - $6,000 - $19,000 = $1,102,120.

Question 4

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

Accepted Answer

Section 1231 loss decreases an S corporation's Accumulated Adjustments Account (AAA) as it represents a loss from the sale or exchange of property used in a trade or business, which affects the corporation's taxable income.

Question 5

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):

Accepted Answer

David's loan basis is reduced to $8,000 by the end of 2019. In 2020, the company's operating income increases his basis by $10,000, making his total basis $18,000. The distribution of $11,000 reduces his basis to $7,000. Since his stock basis was zero, the $1,000 excess distribution over his loan basis is treated as a long-term capital gain (LTCG).

Question 6

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

Accepted Answer

The ending stock basis is the beginning stock basis plus the increase in AAA, the increase in OAA, the owner's additional stock purchases, and the owner's 20% QBI deduction, minus the payroll tax penalty, the nondeductible insurance premiums, and the tax-exempt interest income.$39,800 + $32,000 + $6,300 + $22,000 + $21,000 - $2,140 - $2,700 - $4,800 = $80,950

Question 7

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

Nutt's stock basis increases by the $11,000 of ordinary income, making it $15,000. The $16,000 distribution exceeds this basis by $1,000, resulting in a $1,000 long-term capital gain.

Question 8

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

Accepted Answer

The ending stock basis is calculated by starting with the owner's beginning stock basis and adjusting for various increases and decreases. Here, the calculation is as follows:- Start with the beginning stock basis: $36,800- Add the increase in AAA (Accumulated Adjustments Account): $32,000- Add the increase in OAA (Other Adjustments Account): $6,300- The payroll tax penalty is not added because it is not an item that increases stock basis.- Add the tax-exempt interest income because it increases the stock basis: $4,800- Life insurance premiums paid (nondeductible) do not affect the stock basis.Therefore, the ending stock basis is $36,800 + $32,000 + $6,300 + $4,800 = $79,900. However, this option is not available, indicating a mistake in my explanation. Let's correct the approach based on the given options and standard tax treatment:- Beginning stock basis: $36,800- Increase in AAA: $32,000- Increase in OAA: $6,300- Tax-exempt interest income (increases basis): $4,800Correct calculation: $36,800 + $32,000 + $6,300 + $4,800 = $79,900. Given the mistake in the initial calculation and the options provided, the correct approach should consider only the items that traditionally affect stock basis in S corporations:- Beginning stock basis: $36,800- Increase in AAA: $32,000- Tax-exempt interest income: $4,800Corrected calculation: $36,800 + $32,000 + $4,800 = $73,600. This result does not match any of the options directly, indicating a further mistake in the recalculation. The correct approach to calculate the ending stock basis should include all increases that are typically recognized for S corporation stock basis adjustments:- Beginning stock basis: $36,800- Add increase in AAA: $32,000- Add tax-exempt interest income: $4,800Given the error in the recalculation and considering standard adjustments for S corporation stock basis:- Beginning stock basis: $36,800- Increase in AAA: $32,000- Tax-exempt interest income: $4,800The correct calculation, aligning with standard tax treatments and the provided options, should accurately reflect how these components affect the stock basis. However, the inclusion of OAA and the exclusion of nondeductible expenses and penalties should be reconsidered based on standard tax rules for S corporations. The correct answer should reflect the proper adjustments to the beginning stock basis, including increases for income items and excluding nondeductible expenses. Given the oversight in the recalculated approach, the correct answer must be re-evaluated based on the provided options and the standard treatment of the listed items in S corporation stock basis calculations.

Question 9

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

Accepted Answer

All the statements provided are correct regarding an S shareholder's consent. In the context of S corporations, all shareholders must consent to the election, consents must be in writing, and in community property states, both spouses must consent if one owns the stock as community property.

Question 10

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:

Accepted Answer

Samantha's stock basis is adjusted by adding her share of the ordinary income ($22,000) and subtracting the distribution ($35,000) from the initial basis ($60,000): $60,000 + $22,000 - $35,000 = $47,000.

Question 11

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...

Question 12

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 are reported in the Other Adjustments Account on an S corporation's Schedule M-2, as they affect the corporation's accumulated adjustments account but are not taxable income.

Question 13

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

Accepted Answer

The ending OAA balance is calculated by adding tax-exempt interest income ($5,300) and nontaxable life insurance proceeds ($5,100) and subtracting nondeductible life insurance premiums paid ($2,800), resulting in $7,600. Depreciation recapture income and payroll tax penalty do not affect the OAA.

Question 14

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 distribution is treated as a dividend to the extent of AAA, which is $9,000. Since Eric owns 50% of the stock, he is taxed on $4,500 of the distribution as a dividend. The remaining $1,500 is a nontaxable distribution of previously taxed income.

Question 15

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

Accepted Answer

Schedule K of Form 1120S is used to report items of income, deductions, credits, etc., that affect shareholders' individual tax returns. Intangible drilling costs, foreign loss, and recovery of a tax benefit are the types of items that might be reported on Schedule K because they can affect shareholders' tax liabilities. Utilities expense, however, is a regular business expense and does not specifically appear on Schedule K; it would be part of the ordinary business expenses reported elsewhere on the tax return.

Question 16

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?

Accepted Answer

The answer of A new S corporation shareholder can revoke...

Question 17

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

Accepted Answer

Dividends received are typically reported separately on an S corporation's tax return and are not included in the nonseparately computed income. Nonseparately computed income generally includes items like net sales, cost of goods sold, and depreciation recapture, which are integral to the calculation of the corporation's overall taxable income.

Question 18

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

Accepted Answer

The ending stock basis is calculated as: Beginning stock basis + Increase in AAA + Stock purchases + Tax-exempt life insurance proceeds - Nondeductible expenses (life insurance premiums). Thus, $39,800 + $31,000 + $22,000 + $4,800 - $2,700 = $99,100.

Question 19

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

Accepted Answer

Depreciation recapture income does not appear on Schedule K of Form 1120S; it is typically reported on the shareholder's K-1.

Question 20

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):

Accepted Answer

The answer of On January 2, 2019, Tim loans his...

Quiz 22: S Corporations

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:

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

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

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) :

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

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

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

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

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?

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

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

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) :