Question 1

You are given the following facts about a 40% owner of an S corporation.Calculate her ending stock basis.

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

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 distribution to each shareholder on February 1 is considered to be from AEP and is not taxable to the shareholders. The distribution to each shareholder on September 1 is considered to be from AAA and is also not taxable to the shareholders. 
Therefore, Eric will have $3,000 of AEP ($1,500 from February 1 and $1,500 from September 1) and $6,000 of AAA ($4,500 from February 1 and $1,500 from September 1) at the end of the year. 
Since Eric is receiving a total of $5,000 in taxable distributions ($3,000 from February 1 and $2,000 from September 1), he will have $1,500 of dividend income ($5,000 of taxable distributions minus $3,500 of AEP). Thus, the correct answer is C.

Question 3

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:

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Question 4

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?

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

Question 5

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

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

Question 6

If an S corporation's beginning balance in OAA is zero and the following transactions occur, what is the ending OAA balance?

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The answer of If an S corporation's beginning balance in...

Question 7

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

Accepted Answer

Schedule K on Form 1120S reports the shareholders' pro rata share of items of income, deductions, and credits of the S corporation. Intangible drilling costs, foreign loss, recovery of a tax benefit, and utilities expense all appear on Schedule K. Therefore, the item that does not appear on Schedule K is C) utilities expense.

Question 8

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

Accepted Answer

The ending stock basis is calculated as the beginning stock basis plus stock purchases, increases in AAA, and tax-exempt income, minus nondeductible expenses. Thus, $39,800 + $22,000 + $31,000 + $4,800 - $2,700 = $99,100.

Question 9

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

Accepted Answer

Only life insurance proceeds (nontaxable to the recipient S corporation) would affect the Other Adjustments Account on an S corporation's Schedule M-2. Payroll penalty and unreasonable compensation would be included as expenses on the S corporation's tax return, while taxable interest would be included as income.

Question 10

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

Accepted Answer

The Per-day allocation method is used to allocate S corporation income or losses unless an election to the contrary is made. This method allocates income or losses based on the number of days each shareholder holds the stock during the year. This method is considered the most fair and accurate way to allocate income or losses among shareholders. Option A is incorrect because all shareholders may not agree to a certain method. Options C and D are incorrect because FIFO and LIFO methods are not used to allocate S corporation income or losses.

Question 11

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

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

Question 12

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

Accepted Answer

Dividends received are included in a corporation's separately computed income, not nonseparately computed income. Nonseparately computed income includes items such as net sales, cost of goods sold, and depreciation recapture.

Question 13

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 community property states, both spouses must consent if one owns the stock, all shareholders must consent to an S election, and the consent must be in writing.

Question 14

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):

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The answer of On January 2, 2019, Tim 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 a corporation distributes appreciated property, the shareholder must recognize gain to the extent of the property's fair market value (FMV). In this case, Fred's gain is $100,000 - $20,000 basis = $80,000. Choice A is incorrect because there is a taxable gain. Choices B and D are incorrect because they do not reflect the correct amount of gain that Fred must recognize.

Question 16

You are given the following facts about a 50% owner of an S corporation.Compute her ending stock basis.

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

Question 17

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

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

Question 18

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.  Amit's ending AAA balance is:

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Question 19

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?

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Question 20

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 basis in the S corporation at the beginning of 2020 is $8,000 (the remaining balance of his loan to the S corporation). The S corporation has $10,000 of operating income in 2020. Since the S corporation is a pass-through entity, this income flows through to David and increases his basis in the S corporation to $18,000.

However, David receives distributions of $11,000 in 2020, which exceeds his basis in the S corporation. This means that he will have to recognize a capital gain equal to the excess distribution, which is $3,000 ($11,000 distribution - $8,000 basis). Since David held the stock for over one year (from 2019 to 2020), the gain is a long-term capital gain.

Quiz 15: S Corporations

You are given the following facts about a 40% owner of an S corporation.Calculate her ending stock basis.

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

If an S corporation's beginning balance in OAA is zero and the following transactions occur, what is the ending OAA balance?

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

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) ?

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

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

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

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) :

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:

You are given the following facts about a 50% owner of an S corporation.Compute her ending stock basis.

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

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. Amit's ending AAA balance is:

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?

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) :