Question 1

An S corporation makes a $20,000 cash distribution to a shareholder whose basis in the stock is $19,000. The distribution will result in a $1,000 negative basis in the stock.

Accepted Answer

A cash distribution from an S corporation reduces a shareholder's basis in the stock. In this case, the shareholder's basis would be reduced to $0 after receiving the $20,000 distribution. The shareholder would not have a negative basis in the stock.

Question 2

The amortization of organizational expenditures and the dividends received deduction are allowed in determining the taxable income of an S corporation.

Accepted Answer

S corporations pass through their income, deductions, and credits to their shareholders, who then report these items on their personal tax returns. The amortization of organizational expenditures is allowed, but the dividends received deduction does not apply to S corporations since they generally do not pay corporate income tax on their earnings.

Question 3

An S corporation can be a shareholder in another corporation.

Accepted Answer

An S corporation can own stock in another corporation, but there are limitations as to the type and number of stock it can hold. The subsidiary corporation must also meet the qualifications for an S corporation.

Question 4

In computing the taxable income (or loss) of an S corporation, a domestic production activities deduction (DPAD) is allowed.

Accepted Answer

The domestic production activities deduction (DPAD) was repealed for tax years beginning after December 31, 2017, by the Tax Cuts and Jobs Act.

Question 5

Under certain circumstances, an S corporation can have more than 100 shareholders.

Accepted Answer

An S corporation can have more than 100 shareholders if certain family members count as one shareholder. Additionally, the 100 shareholder limit does not include certain types of trusts or certain types of pension plans.

Question 6

If the shareholders of a calendar year C corporation elect S status on Friday, March 11, 2017, the election is effective for all of 2017.

Accepted Answer

An S corporation election is effective for the entire tax year in which it is made, as long as the election is made by the 15th day of the third month of that year (March 15 for calendar year taxpayers). In this case, the election is being made on March 11, 2017, well before the March 15 deadline, so it will be effective for the full 2017 tax year.

Question 7

Canary Corporation, a calendar year S corporation, issues some of its stock to a nonresident alien on March 4, 2017. Canary becomes a C corporation as of March 5, 2017.

Accepted Answer

The answer of Canary Corporation, a calendar year S corporation,...

Question 8

Darlene, a 30% shareholder in a calendar year S corporation, sells her stock on June 6, 2017. If the corporation has an operating loss for 2017, none of this loss can be claimed by Darlene because she was not a shareholder as of December 31, 2017.

Accepted Answer

Darlene can claim her share of the operating loss for the portion of the year she was a shareholder, up until June 6, 2017. Shareholders in an S corporation can claim losses based on their ownership percentage and the time they held the stock during the year.

Question 9

Satisfying the definition of a small business corporation is no longer necessary once the S election is initially made.

Accepted Answer

A corporation must continuously meet the requirements of a small business corporation to maintain its S corporation status.

Question 10

On March 4, 2017, all of the shareholders of Kingfisher Corporation (a calendar year entity) voluntarily revoke the S election (effective as soon as possible). For all of 2017, Kingfisher Corporation will be a C corporation.

Accepted Answer

All of the shareholders of a corporation have the right to revoke the S election, and if they do so, the corporation will become a C corporation for the entire year. Therefore, the statement is true.

Question 11

In computing the taxable income (or loss) of an S corporation, an NOL carryover from a prior year is not allowed.

Accepted Answer

S corporations pass their income, deductions, and credits through to their shareholders, who then report these items on their personal tax returns. NOL (Net Operating Loss) carryovers are used at the shareholder level, not at the corporate level, for S corporations.

Question 12

A shareholder's basis in property received as a dividend is its fair market value on the date of the distribution.

Accepted Answer

According to IRS rules, a shareholder's basis in property received as a dividend is its fair market value on the date of the distribution.

Question 13

Sarah, a sole shareholder, rents property to her corporation. The rent income she receives from the lease is a constructive dividend to Sarah.

Accepted Answer

The rent income Sarah receives from leasing property to her corporation is considered rental income to her, not a constructive dividend, as long as the transaction is conducted at fair market value and follows an arm's length principle. Constructive dividends typically occur when a corporation confers a benefit on a shareholder without the expectation of repayment, not in a legitimate, arm's-length rental transaction.

Question 14

If a corporation has no E & P, its shareholders will not have constructive dividends.

Accepted Answer

E & P stands for earnings and profits. Constructive dividends are when a corporation is treated as having distributed a dividend to its shareholders even though no actual dividend was paid. However, if the corporation has no E & P, there is no basis for constructive dividends to be attributed to the shareholders.

Question 15

Unlike regular dividends, constructive dividends need not be distributed to a corporation's shareholders on a pro rata basis.

Accepted Answer

Constructive dividends are not actual dividends paid out to shareholders, but instead, they are actions taken by the corporation that result in a benefit to the shareholder. This benefit can take many forms, such as the corporation paying for personal expenses of a shareholder or issuing the shareholder a loan with favorable terms. Since constructive dividends are not distributed in the traditional sense, they need not be distributed on a pro rata basis.

Question 16

Examples of separately stated items of an S corporation include tax-exempt interest.

Accepted Answer

Tax-exempt interest is a separately stated item of an S corporation, meaning it is reported separately from other income on the shareholders' K-1 forms.

Question 17

The taxable income (or loss) of an S corporation is allocated to each shareholder on a per-share and per-day of stock ownership basis.

Accepted Answer

This is true. Shareholders of an S corporation receive a Form K-1 which reports their allocated share of the corporation's income or loss based on their stock ownership and the number of days during the tax year that they owned the stock. Each shareholder's portion is then reported on their individual tax returns.

Question 18

Jacob is a shareholder in Robin Corporation, an S corporation. Jacob's share of Robin's activities for the current year is a short-term capital gain of $80,000 and an operating loss of $50,000. As a result of these transactions, Jacob should increase his basis in the Robin stock by $30,000.

Accepted Answer

Shareholders' basis in an S corporation increases by their share of income, including capital gains, and decreases by their share of losses. In this case, Jacob's share of the S corporation's activities results in a net increase of $30,000 ($80,000 - $50,000) in his basis.

Question 19

In order to voluntarily revoke an S election, all of the shareholders must consent to the revocation.

Accepted Answer

Only a majority of shareholders are required to consent to the revocation of an S election, not all of them.

Question 20

As a separately stated item, the long-term capital losses of an S corporation will pass through to its shareholders as short-term capital losses.

Accepted Answer

Long-term capital losses of an S corporation are passed through to its shareholders as long-term capital losses, not as short-term capital losses.

Quiz 20: Corporations and Partnerships