Question 1

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 2

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 an):

Accepted Answer

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

Question 3

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 4

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

A new S corporation shareholder who owns more than 50% of the existing S corporation's stock can unilaterally revoke the S election. This is because he or she has the majority of the voting power in the corporation.

Question 5

You are given the following facts about a 40% owner of an S corporation. Calculate 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 6

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

Accepted Answer

The ending OAA balance is calculated by adding tax-exempt interest income ($5,300) and nontaxable life insurance proceeds ($5,100), which are the only items affecting the OAA. Thus, $5,300 + $5,100 = $10,400. However, the life insurance premiums paid ($2,800) are subtracted, resulting in an ending OAA balance of $7,600.

Question 7

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 the beginning stock basis plus increases minus decreases. Increases include the increase in AAA, OAA, tax-exempt income, and stock purchases. Decreases include nondeductible expenses like life insurance premiums. Calculation: $39,800 + $31,000 + $6,300 + $4,800 + $22,000 - $2,700 = $99,100.

Question 8

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 affected by items of income and deduction that pass through to the shareholders. Starting with an AAA balance of $614,000, we add operating income ($501,000), interest income ($6,500), dividend income ($13,020), and municipal bond interest income ($6,000) because these are all items that increase AAA. We do not subtract the long-term capital loss ($7,400), Section 179 depreciation deduction ($6,000), or charitable contributions ($19,000) because these items either do not decrease AAA or are specifically excluded from affecting AAA. Cash distributions do not directly affect the AAA balance; they are distributions of the balance. Therefore, the calculation is $614,000 + $501,000 + $6,500 + $13,020 + $6,000 = $1,140,520. None of the provided options match this calculation, indicating the correct answer is some other amount.

Question 9

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

Accepted Answer

Per-day allocation is the default method used to allocate S corporation income or losses unless an election to the contrary is made.

Question 10

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

Accepted Answer

Life insurance proceeds nontaxable to the recipient S corporation affect the Other Adjustments Account on an S corporation's Schedule M-2. This is because these proceeds increase the S corporation's accumulated adjustments account (AAA), which in turn increases the Other Adjustments Account on Schedule M-2. The other transactions listed (payroll penalty, unreasonable compensation, taxable interest) would not affect the Other Adjustments Account specifically.

Question 11

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 at the beginning of the year is $60,000. She receives a distribution of $35,000 during the year which decreases her stock basis to $25,000. Evita's ordinary income for the year is $22,000, which increases her stock basis to $47,000. When she sells her stock for an unknown amount, her stock basis at the time of the sale is $47,000.

Question 12

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

Accepted Answer

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

Question 13

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 computed as follows:Beginning stock basis $39,800Increase in AAA 32,000Increase in OAA 6,300Payroll tax penalty 2,140Tax-exempt interest income 4,800Insurance premiums paid (nondeductible) 2,700Owner's additional stock purchases 22,000Owner's 20% QBI deduction 21,000Ending stock basis $80,950

Question 14

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 an):

Accepted Answer

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

Question 15

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 its shareholders, the distribution is treated as a taxable gain to the extent that it exceeds the shareholder's stock basis. In this case, Fred's stock basis is $20,000, but the distribution of appreciated property has a basis of $100,000, resulting in a taxable gain of $80,000 ($100,000 - $20,000). Therefore, the correct answer is choice C.

Question 16

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, specific rules apply to shareholder consent for the S election, including the requirement for written consent from all shareholders, and in community property states, both spouses must consent if one owns stock as community property.

Question 17

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

Accepted Answer

Utilities expense does not appear on Schedule K of Form 1120S, while the other items listed (intangible drilling costs, foreign loss, recovery of a tax benefit) do appear on Schedule K.

Question 18

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

Accepted Answer

The answer of Which item does not appear on Schedule...

Question 19

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 20

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

Accepted Answer

Dividends received are not included in an S corporation's nonseparately computed income. Nonseparately computed income includes all income, deductions, gains, and losses that do not have to be separately allocated among the shareholders of the S corporation. Net sales, cost of goods sold, and depreciation recapture are all examples of items that would be included in nonseparately computed income.

Quiz 12: S Corporations

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 an) :

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

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?

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

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

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 an) :

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

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

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

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