Question 1

Form 1120S provides an S shareholder's computation of his or her stock basis.

Accepted Answer

The answer of Form 1120S provides an S shareholder's computation...

Question 2

Any distribution made by an S corporation during a tax year is taken into account before accounting for the year's losses.

Accepted Answer

This is correct according to the IRS. S corporation distributions are generally made from retained earnings and profits, meaning that they must be taken into account before accounting for any losses in the same year.

Question 3

An S corporation must possess which of the following characteristics?

Accepted Answer

An S corporation must not have more than one hundred shareholders, be organized in the U.S., and have only one class of stock. Therefore, all of the above characteristics are required of an S corporation.

Question 4

An S shareholder's stock basis can be reduced below zero.

Accepted Answer

An S shareholder's stock basis cannot be reduced below zero. Instead, losses that would reduce the basis below zero are suspended and carried forward to future years to be deducted when the shareholder has sufficient basis.

Question 5

An S shareholder's stock basis does not include a ratable share of S corporation liabilities.

Accepted Answer

An S shareholder's stock basis only includes their share of the corporation's liabilities to the extent of their stock ownership. It does not include a ratable share of the corporation's total liabilities.

Question 6

Compensation for services rendered to an S corporation is subject to FICA taxes.

Accepted Answer

Compensation paid to employees of an S corporation is subject to FICA taxes, which includes Social Security and Medicare taxes. The S corporation must withhold the employees' portion of FICA taxes and also pay its own share of Social Security and Medicare taxes as the employer.

Question 7

The LIFO recapture tax is a variation of the passive investment income penalty tax.

Accepted Answer

The LIFO recapture tax and the passive investment income penalty tax are separate and distinct taxes, each with their own specific rules and calculations.

Question 8

An S corporation shareholder's stock basis includes his or her direct investments plus a ratable share of any corporate liabilities.

Accepted Answer

An S corporation shareholder's stock basis includes his or her direct investments and any separately stated income items, but it does not include a share of corporate liabilities. Corporate liabilities affect a shareholder's basis in an S corporation only in the context of determining the basis of any debt the corporation owes to the shareholder, not the basis of the shareholder's stock.

Question 9

Pass-through S corporation losses can reduce the basis in the shareholder's loan to the entity,but distributions do not reduce loan basis.

Accepted Answer

This is true according to the IRS guidelines. When the shareholder's loan is reduced by pass-through losses, it means that the shareholder now has less debt owed to the S corporation. However, distributions do not affect the loan basis because they are considered a return of capital rather than a repayment of debt.

Question 10

Any losses that are suspended under the at-risk rules are carried forward and are available during an S corporation's post-termination period.

Accepted Answer

Suspended losses that are subject to the at-risk rules can be carried forward and utilized during an S corporation's post-termination period.

Question 11

The corporate-level tax on recognized built-in gains applies in 2015 when an S corporation disposes of an asset in a taxable disposition within ten years after the date on which the S election took effect.

Accepted Answer

The statement is true. According to IRS regulations, the corporate-level tax on recognized built-in gains applies in 2015 when an S corporation disposes of an asset in a taxable disposition within ten years after the date on which the S election took effect.

Question 12

It is not beneficial for an S corporation to issue § 1244 stock.

Accepted Answer

It can be beneficial for an S corporation to issue § 1244 stock as it allows shareholders to deduct losses incurred from the sale or exchange of stock as ordinary losses (up to a certain limit) rather than capital losses. This can provide tax benefits to the shareholders.

Question 13

The passive investment income of an S corporation includes net capital gains from the sale of stocks and securities.

Accepted Answer

Net capital gains from the sale of stocks and securities are considered passive investment income for an S corporation.

Question 14

The carryover period for the NOLs of a C corporation does not continue to run during S corporation years.

Accepted Answer

The answer of The carryover period for the NOLs of...

Question 15

An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions.

Accepted Answer

The answer of An S shareholder's stock basis is reduced...

Question 16

An S corporation can claim a deduction for its NOL carryovers.

Accepted Answer

The answer of An S corporation can claim a deduction...

Question 17

An S corporation is subject to the following tax.

Accepted Answer

The answer of An S corporation is subject to the...

Question 18

Any excess of S corporation losses or deductions over the shareholder's combined stock and debt basis is suspended until there is a subsequent stock or debt basis.

Accepted Answer

This is known as the "basis limitation" and it is a fundamental rule for S corporations. Any losses or deductions that exceed the shareholder's stock and debt basis are suspended and cannot be taken in the current year. Instead, they are carried forward and applied against future income when there is sufficient basis.

Question 19

Which statement is incorrect?

Accepted Answer

S corporations are treated as flow-through entities for Federal income tax purposes, meaning that they are not taxed on their income at the corporate level, but rather the income flows through to the shareholders and is reported on their individual tax returns. However, for state law purposes, S corporations are still treated as corporations. Statement A is correct because S corporations are treated as corporations under state law. Statement C is also correct because distributions of appreciated property are taxable to the S corporation. Therefore, the incorrect statement is B, which suggests that S corporations are treated as partnerships for Federal income tax purposes.

Question 20

An S shareholder's basis is decreased by distributions treated as being paid from AAA.

Accepted Answer

According to the rules of S corporations, distributions treated as being paid from accumulated adjustments account (AAA) are tax-free and do not affect the shareholder's basis. However, distributions treated as being paid from earnings and profits (E&P) are taxable and decrease the shareholder's basis.

Quiz 15: S Corporations