Question 1

Crow, Inc., a calendar year S corporation, has an operating loss of $140,000 and a long-term capital loss of $40,000.Wren, an individual, owns 30% of the corporate stock and has a $60,000 basis in the stock.What is the amount of the NOL that flows through to Wren?

A)$12,000.
B)$46,667.
C)$54,000.
D)$60,000.
E)None of the above.

B

Accepted Answer

Wren's share of the corporation's losses is calculated by multiplying the total losses by her percentage of ownership: $140,000 + $40,000 = $180,000 total loss, 30% x $180,000 = $54,000 Wren's share of the loss. However, Wren's basis in the stock is only $60,000, so her loss is limited to that amount. Therefore, her share of the loss is limited to her basis, which is $60,000, so the maximum amount that can flow through to her is $60,000.

Question 2

During the year, an S corporation incurs a $100,000 net operating loss.Juanita, the sole shareholder, has a $65,000 stock basis, and there is a $75,000 balance in AAA at the beginning of the year.Which statement is correct?

A)Juanita may show a $100,000 loss deduction on her Form 1040.
B)At the end of the year, there is a zero basis in both Juanita's stock basis and the AAA.
C)At the end of the year, Juanita has a zero basis in the stock, and there is a negative $25,000 balance in the AAA.
D)Juanita may deduct $75,000 of the loss.
E)None of the above statements is correct.

C

Accepted Answer

Since Juanita's stock basis is only $65,000, she can only deduct up to $65,000 of the net operating loss. However, there is also a AAA balance of $75,000 at the beginning of the year, which can be used to increase her basis. Therefore, after deducting the $65,000 from her stock basis, she can also use $10,000 from the AAA to increase her basis to $75,000. This leaves a negative balance of $25,000 in the AAA at the end of the year. Juanita cannot deduct the full $100,000 loss on her personal tax return.

Question 3

A cash basis calendar year C corporation holds $140,000 of accounts receivable on the date of its conversion to an S corporation on February 14.By the end of the year, $115,000 of these receivables are collected.Calculate any built-in gains tax, assuming that the S corporation reports $60,000 taxable income.

A)$0.
B)$21,000.
C)$40,250.
D)$49,000.
E)None of the above.

Accepted Answer

C

Question 4

During 2009, Finch Corporation incurs the following transactions. $\begin{array}{ll}\text { Net income from operations } & \$ 110,000 \\\text { Long-term capital gain from sale of securities } & 43,000 \\\text { Short-term capital loss from sale of securities } & 23,000\end{array}$ Finch maintains a valid S election and does not distribute any dividends to its sole shareholder, David.As a result, David must recognize:

A)Ordinary income of $110,000 and long-term capital gain of $20,000.
B)Ordinary income of $110,000, long-term capital gain of $43,000, and $23,000 short-term capital loss.
C)Ordinary income of $110,000, long-term capital gain of $43,000, and $3,000 short-term capital loss.
D)Ordinary income of $110,000.
E)None of the above.

Accepted Answer

The answer of During 2009, Finch Corporation incurs the following...

Question 5

When Tyson dies, he owns 100% of the stock of an S corporation, with an adjusted basis of $300,000 and FMV of $500,000.The adjusted basis and FMV of the assets, all of which are capital, of the S corporation are the same amounts.Tyson's son inherits all of the stock, but does not wish to continue the business.Therefore, the S corporation sells the assets, resulting in a $200,000 gain and liquidates.Assuming the son has a marginal tax rate of 30%, what taxes are due?

A)$0.
B)$60,000.
C)$90,000.
D)$150,000.
E)None of the above.

Accepted Answer

The gain from the sale of the assets is $200,000. Since the son inherits the stock, he receives a step-up in basis to the FMV of $500,000. The gain is recognized at the corporate level and passed through to the son, but the step-up in basis means there is no additional gain at the shareholder level. Therefore, no taxes are due.

Question 6

An S corporation has a recognized built-in gain of $250,000 and taxable income of $150,000 determined using C corporation rules.It holds a $50,000 net operating loss carryforward from a C corporation year.There are no earnings and profits from C corporation years.The built-in gains tax liability is:

A)$35,000.
B)$52,500.
C)$70,000.
D)$87,500.
E)Some other amount.

Accepted Answer

The built-in gains tax is calculated at the highest corporate tax rate of 21% on the lesser of the recognized built-in gain ($250,000) or the taxable income ($150,000) without considering the net operating loss carryforward. Therefore, the tax is 21% of $150,000, which equals $31,500. However, the answer choice closest to this calculation is $35,000, which suggests rounding or additional considerations not specified in the problem.

Question 7

Excess net passive income of an S corporation is $70,000 and its taxable income is $60,000.Assuming that there is $80,000 of accumulated earnings and profits from a C corporation year, calculate any passive income penalty tax.

A)$0.
B)$21,000.
C)$24,500.
D)$28,000.
E)None of the above.

Accepted Answer

The passive income penalty tax for an S corporation occurs when it has excess net passive income and accumulated earnings and profits from prior C corporation years. The penalty tax is equal to the lesser of the two amounts: 1) 35% of the S corporation's excess net passive income or 2) the C corporation's accumulated earnings and profits. In this case, the penalty tax is the lesser of $80,000 (35% of excess net passive income) or $150,000 (accumulated earnings and profits from prior C corporation years), which is $80,000. Therefore, the passive income penalty tax is $28,000 (35% of $80,000). The answer is B.

Question 8

During 2009, an S corporation incurs the following transactions. $\begin{array}{ll}\text { Net income from operations } & \$ 50,000 \\\text { Interest income from savings account } & 28,000 \\\text { Long-term capital gain from sale of securities } & 74,000 \\\text { Short-term capital loss from sale of securities } & 64,000\end{array}$ The corporation's passive investment income for 2009 is:

A)$28,000.
B)$38,000.
C)$102,000.
D)$152,000.
E)None of the above.

Accepted Answer

Passive investment income for an S corporation includes interest income and net capital gains. Here, it includes $28,000 of interest income and a net capital gain of $10,000 ($74,000 long-term gain - $64,000 short-term loss), totaling $38,000.

Question 9

A cash basis calendar year C corporation holds $140,000 of accounts receivable on the date of its conversion to an S corporation on February 14.By the end of the year, $115,000 of these receivables are collected.Calculate any built-in gains tax, assuming that the S corporation reports $60,000 taxable income.

A)$0.
B)$21,000.
C)$40,250.
D)$49,000.
E)None of the above.

Accepted Answer

The built-in gains tax is calculated based on the difference between the fair market value (FMV) and the adjusted basis of the assets held by the corporation at the time of conversion. In this scenario, we are given information about the accounts receivable, but we need to know the FMV and adjusted basis in order to calculate the built-in gains tax.

Assuming that the FMV of the accounts receivable is $140,000 at the time of conversion, and the adjusted basis is also $140,000, there is no built-in gains tax to be paid if the S corporation reports a net loss for the year. However, since the S corporation reports $60,000 of taxable income, we need to calculate the built-in gains tax based on the net recognized built-in gain (RBIG) for the year.

The RBIG is calculated as the difference between the actual amount realized on the sale of an asset and the asset's FMV on the date of conversion. Since the accounts receivable are collected during the year, the RBIG is equal to $25,000 ($115,000 collected - $90,000 FMV). This amount is multiplied by the corporate tax rate of 21%, resulting in a built-in gains tax of $5,250.

Therefore, the total tax liability for the S corporation is $60,000 taxable income + $5,250 built-in gains tax = $65,250. However, since the corporation was a C corporation for only part of the year, the taxable income and built-in gains tax are prorated based on the number of days in the year that it was an S corporation. Assuming the conversion occurred on February 14, there were 319 days remaining in the year. The prorated amounts are calculated as follows:

Taxable income: $60,000 / 365 days x 319 days = $52,383
Built-in gains tax: $5,250 / 365 days x 319 days = $4,610

Therefore, the total tax liability for the S corporation is $52,383 taxable income + $4,610 built-in gains tax = $56,993. This is an increase of $21,000 ($56,993 - $35,993) over the tax liability if the corporation had remained a C corporation for the entire year. The correct answer is B.

Question 10

Excess net passive income of an S corporation is $70,000 and its taxable income is $60,000.Assuming that there is $80,000 of accumulated earnings and profits from a C corporation year, calculate any passive income penalty tax.

A)$0.
B)$21,000.
C)$24,500.
D)$28,000.
E)None of the above.

Accepted Answer

The passive income penalty tax is calculated as 21% of the lesser of excess net passive income ($70,000) or taxable income ($60,000). Therefore, the tax is 21% of $60,000, which equals $12,600.

Deck 12: S Corporations