Question 1

A calendar year C corporation reports a $41,000 NOL in 2015, but it elects S status for 2016 and generates an NOL of $30,000 in that year. At all times during 2016, 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 2016. How much of the 2016 loss, if any, is deductible by Kris?

Accepted Answer

The answer of A calendar year C corporation reports a...

Question 2

Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation, for $12,000. He had owned the stock for three years and had a stock basis of $111,000 in the shares. Claude is single, and he is the original owner of the § 1244 stock shares. Calculate the appropriate tax treatment.

Accepted Answer

As Claude is the original owner of the § 1244 stock shares, he can treat the loss as an ordinary loss up to $50,000 ($100,000 for married filing jointly). The remaining loss of $49,000 ($99,000 loss - $50,000 ordinary loss) would be a long-term capital loss. Therefore, the appropriate tax treatment would be a $50,000 ordinary deduction and a $49,000 long-term capital loss.

Question 3

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

Accepted Answer

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

Question 4

On January 2, 2015, Tim loans his S corporation $10,000. By the end of 2015, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to Tim of $8,000. Tim reports a(n):

Accepted Answer

The answer of On January 2, 2015, Tim loans his...

Question 5

You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis.
​

Accepted Answer

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

Question 6

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 at the beginning of the year is $60,000. She also received a distribution of $35,000 on May 3rd, which reduces her stock basis to $25,000 ($60,000 - $35,000). Evita's ordinary income for the year is $22,000, which increases Samantha's stock basis to $47,000 ($25,000 + $22,000). When she sells all of her stock on October 11th, her stock basis is $47,000. Therefore, the correct answer is D.

Question 7

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

Accepted Answer

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

Question 8

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 9

You are given the following facts about a solely owned S corporation. What is the shareholder's ending stock basis?
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Accepted Answer

The shareholder's ending stock basis is equal to the beginning stock basis plus any income reported on the K-1, minus any losses and distributions. Beginning stock basis is $100,000. On the K-1, there is $50,000 of income allocated. There are no losses or distributions. Therefore, the ending stock basis is $100,000 + $50,000 = $150,000. However, stock basis cannot exceed the amount of the shareholder's investment in the S corporation, which in this case is $99,100. Therefore, the ending stock basis is $99,100.

Question 10

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 the S corporation distributes property to the shareholder, the distribution is generally not taxable to the extent of the shareholder's stock basis. In this case, Fred's stock basis is $20,000, and he receives a distribution of property with a fair market value of $100,000 and a basis of $20,000. Since the distribution is less than or equal to his stock basis, he does not recognize any gain on the distribution. However, if Fred were to sell the appreciated property at its fair market value of $100,000, he would recognize a taxable gain of $80,000 ($100,000 - $20,000 basis).

Question 11

During 2016, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2015, 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 2016, Miles Nutt, the sole shareholder...

Question 12

On January 2, 2015, David loans his S corporation $10,000. By the end of 2015 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to David of $11,000. David reports a(n):

Accepted Answer

The answer of On January 2, 2015, David loans his...

Question 13

Oxen Corporation incurs the following transactions.
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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

The answer of Oxen Corporation incurs the following transactions.
​

Oxen maintains...

Question 14

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:

Accepted Answer

The answer of Amit, Inc., an S corporation, holds an...

Question 15

A cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to S status on February 14. By the end of the year, $60,000 of these receivables are collected. Calculate any built-in gains tax, assuming that there is sufficient taxable income.

Accepted Answer

The answer of A cash basis calendar year C corporation...

Question 16

On January 1, Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight. The dirt company has 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

Since the sale occurred on the 200th day, Bobby owned the stock for exactly half of the year. Therefore, he is entitled to half of the annual loss of $60,000, which is $30,000.

However, S corporations allocate items of income, loss, deduction, and credit on a pro rata basis for the portion of the year in which a shareholder holds stock. Since Alice and Bobby owned the stock equally for the first 199 days of the year, they would each be allocated half of the losses incurred during that period, or $15,000 each.

When Bobby sold his stock to Saul on day 200, Saul is treated as if he owned the stock for the rest of the year. Therefore, he would be allocated the remaining $30,000 loss on a pro rata basis for the 165 days he owned the stock (assuming a 365-day year), which is $16,438.

In summary, Alice and Bobby would each have an allocation of $15,000, while Saul would have an allocation of $16,438. Bobby would not have any allocation of the loss after he sold his stock on the 200th day. Therefore, the answer is choice C, $16,438 allocated to Saul.

Question 17

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 Erin taxed on the distribution?

Accepted Answer

First, we need to determine each shareholder's share of AEP:

Eric’s share = (500/1000) x $5,000 = $2,500 
Maria’s share = (500/1000) x $5,000 = $2,500

Next, we need to determine the balance in each shareholder's AAA account after the February dividend distribution:

Eric's AAA balance after February distribution: 
Beginning balance = $4,500 
Distribution = $6,000 x (500/1000) = $3,000 
Ending balance = $4,500 - $3,000 = $1,500

Maria's AAA balance after February distribution: 
Beginning balance = $4,500 
Distribution = $6,000 x (500/1000) = $3,000 
Ending balance = $4,500 - $3,000 = $1,500

Now, we can determine the taxability of the September distribution. Each shareholder will receive:

$3,000 x (500/1000) = $1,500

Since each shareholder has a positive AAA balance after the February distribution, the September distribution is considered a dividend distribution from AAA rather than AEP.

Therefore, Eric will have $1,500 of dividend income, and so will Maria.

Question 18

Pepper, Inc., an S corporation, holds a $1 million balance in accumulated E&P. It reports sales revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the interest income of $140,000. What is Pepper's passive income penalty tax payable, if any?

Accepted Answer

Pepper's net passive income is computed as follows:
Taxable interest ($380,000) less interest deductions ($140,000) = $240,000.
The passive income penalty tax is the lesser of the following:
- The excess of taxable income ($590,000) over the lower limit of the 35% tax bracket ($415,050 for 2021) multiplied by the highest corporate tax rate (21%) = ($590,000 - $415,050) × 21% = $36,855.50; or
- Net passive income ($240,000) multiplied by the highest corporate tax rate (21%) = $50,400.
Therefore, Pepper's passive income penalty tax payable is $40,895 (the lesser of the above two amounts).

Question 19

Mock Corporation converts to S corporation status in 2016. Mock used the LIFO inventory method in 2015 and had a LIFO inventory of $435,000 (FIFO value of $550,000) on the date of the S election. How much tax must be added to Mock's 2015 corporate tax liability, assuming that Mock is subject to a 35% tax rate.

Accepted Answer

When a C corporation elects to become an S corporation, it is deemed to have sold and repurchased its assets at fair market value. This includes inventory, which must be valued using the FIFO method. In this case, the LIFO inventory of $435,000 must be adjusted to its FIFO value of $550,000, resulting in a $115,000 increase in taxable income. At a 35% tax rate, this results in a tax liability of $40,250. However, since this is an adjustment to 2015 taxable income, it must be added to the 2015 tax liability, resulting in a total tax increase of $10,062.50. Therefore, the correct answer is B.

Question 20

Randall owns 800 shares in Fabrication, Inc., an S corporation in Moss Hill, Texas. For this tax year, the basis in his stock is $30,000, before the adjustment for this year's losses. Randall's share of the corporation's ordinary loss is $20,000, and his share of its capital loss is $15,000. How much can Randall deduct due to these losses?

Accepted Answer

First, we need to determine Randall's adjusted stock basis after the losses:

$30,000 (starting basis) - $20,000 (ordinary loss) - $15,000 (capital loss) = -$5,000

Since Randall's adjusted stock basis is negative, he can deduct up to the amount of his losses or up to the amount of his adjusted stock basis, whichever is less.

Therefore, Randall can deduct:
- $17,143 for the ordinary loss ($5,000 + $20,000 = $25,000; $25,000 - $7,857 = $17,143)
- $12,857 for the capital loss ($5,000 + $15,000 = $20,000; $20,000 - $7,143 = $12,857)

So the answer is C.

Quiz 15: S Corporations

Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation, for $12,000. He had owned the stock for three years and had a stock basis of $111,000 in the shares. Claude is single, and he is the original owner of the § 1244 stock shares. Calculate the appropriate tax treatment.

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

On January 2, 2015, Tim loans his S corporation $10,000. By the end of 2015, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to Tim of $8,000. Tim reports a(n) :

You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis.

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

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

You are given the following facts about a solely owned S corporation. What is the shareholder's ending stock basis?

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:

During 2016, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2015, 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?

On January 2, 2015, David loans his S corporation $10,000. By the end of 2015 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to David of $11,000. David reports a(n) :

Oxen Corporation incurs the following transactions. 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:

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 cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to S status on February 14. By the end of the year, $60,000 of these receivables are collected. Calculate any built-in gains tax, assuming that there is sufficient taxable income.

Quiz 15: S Corporations

Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation, for $12,000. He had owned the stock for three years and had a stock basis of $111,000 in the shares. Claude is single, and he is the original owner of the § 1244 stock shares. Calculate the appropriate tax treatment.

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

On January 2, 2015, Tim loans his S corporation $10,000. By the end of 2015, Tim's stock basis is zero, and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to Tim of $8,000. Tim reports a(n) :

You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis. ​

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

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

You are given the following facts about a solely owned S corporation. What is the shareholder's ending stock basis? ​

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:

During 2016, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. On December 31, 2015, 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?

On January 2, 2015, David loans his S corporation $10,000. By the end of 2015 David's stock basis is zero and the basis in his note has been reduced to $8,000. During 2016, the company's operating income is $10,000. The company makes 2016 distributions to David of $11,000. David reports a(n) :

Oxen Corporation incurs the following transactions. ​ 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:

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 cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to S status on February 14. By the end of the year, $60,000 of these receivables are collected. Calculate any built-in gains tax, assuming that there is sufficient taxable income.

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

You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis.

You are given the following facts about a solely owned S corporation. What is the shareholder's ending stock basis?

Oxen Corporation incurs the following transactions. 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:

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: