Deck 12: S Corporations

Question 1

Distributions of appreciated property by an S corporation are not taxable to the entity.

Answer 1

False

Question 2

If a resident alien shareholder moves outside the U.S., the S election is terminated.

Answer 2

True

Question 3

The termination of an S election occurs on the day after a corporation ceases to be a qualifying S corporation.

Answer 3

False

Question 4

Where the S corporation rules are silent, C corporation provisions apply.

Question 5

Only 51% of the shareholders must consent to an S election.

Question 6

Most limited liability partnerships can own stock in an S corporation.

Question 7

An S election made before becoming a corporation is valid only beginning with the first 12-month tax year.

Question 8

An S corporation cannot incur a tax liability at the corporation level.

Question 9

Tax-exempt income at the S corporation level flows through as taxable to the shareholder.

Question 10

S corporations are treated as partnerships under state property laws.

Question 11

Most IRAs cannot own stock in an S corporation.

Question 12

A newly formed S corporation does not receive any tax benefit from an NOL incurred in its first tax year.

Question 13

For a new corporation, a premature S election may not be effective.

Question 14

Liabilities affect the owner's basis differently in an S corporation than they do in a partnership.

Question 15

An S corporation cannot be a shareholder in another corporation.

Question 16

S corporation status allows shareholders to realize tax benefits from corporate losses immediately (assuming sufficient stock basis).

Question 17

An S election is made on the shareholder's Form 2553.

Question 18

An estate may be a shareholder of an S corporation.

Question 19

Persons who were S shareholders during any part of the year before the election date, but were not shareholders when the election was made, also must consent to an S election.

Question 20

NOL carryovers from C years can be used in an S corporation year against ordinary income.

Question 21

A capital loss allocated to a shareholder always reduces the Other Adjustments Account.

Question 22

A distribution from OAA is taxable.

Question 23

An S corporation may not amortize its organization expenses.

Question 24

Depreciation recapture income is a Schedule K item on the Form 1120S.

Question 25

The passive investment income of an S corporation includes gains from the sale of securities.

Question 26

An S shareholder's basis is increased by stock purchases and capital contributions.

Question 27

Post-termination distributions that are charged against OAA are received tax-free.

Question 28

All tax preference items flow through the S corporation, to be included in the shareholders' AMT calculations.

Question 29

An item that appears in the "Other Adjustments Account" affects stock basis, but not AAA, such as tax-exempt interest.

Question 30

An S shareholder who dies during the S corporation tax year must report his or her share of the pro rata income (loss) items up to the date of death, on the final individual tax return.

Question 31

The Schedule M-3 is the same for a C corporation and an S corporation.

Question 32

A per-day, per-share allocation of flow-through S corporation items must be used, unless the shareholder disposes of the entire interest in the entity.

Question 33

Tax-exempt income at the corporate level flows through as exempt to S shareholders.

Question 34

When loss assets are distributed by an S corporation, a shareholder's basis is equal to the asset's fair market value.

Question 35

Any distribution of cash or property by a corporation that does not exceed the balance of AAA with respect to S stock during a post-termination transition period of approximately one year is applied against and reduces the basis of the S stock.

Question 36

Tax-exempt income is not separately stated on Schedule K of Form 1120S.

Question 37

An S corporation does not recognize a loss when distributing assets that are worth less than their basis.

Question 38

An S corporation that has total assets of at least $50 million on Schedule L at the end of the tax year must file a Schedule M-3.

Question 39

A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special capital gain treatment.

Question 40

The Section 179 expense deduction is a Schedule K item on the Form 1120S.

Question 41

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

Question 42

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

Question 43

Which statement is incorrect?

A)S corporations are treated as corporations under state law.
B)S corporations are treated as partnerships for Federal income tax purposes.
C)Distributions of appreciated property are taxable to the S corporation.
D)None of the above statements is incorrect.

Question 44

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

Question 45

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

Question 46

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

Question 47

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.

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

An S corporation is subject to the following tax.

A)Corporate income tax (§ 11).
B)Built-in gains tax.
C)Alternative minimum tax.
D)None of the above apply to S corporations.

Question 53

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

Question 54

The § 1202 exclusion of gain is not available on disposition of S corporation stock.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

The corporate-level tax on recognized built-in gains applies in 2016 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 61

Which corporation is eligible to make the S election?

A)Non-U.S. corporation.
B)Limited liability company.
C)Insurance company.
D)U.S. bank.
E)None of the above can select S status.

Question 62

The maximum number of actual shareholders in an S corporation is:

A)75.
B)100.
C)200.
D)Some other number.
E)Indeterminable.

Question 63

Identify a disadvantage of being an S corporation.

A)Estates can be shareholders.
B)Losses flow through immediately to the shareholders.
C)The AMT on corporations is avoided.
D)Tax-exempt income flows through as excludible to shareholders.
E)None of the above is a disadvantage of the S election.

Question 64

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

A)Intangible drilling costs.
B)Foreign loss.
C)Utilities expense.
D)Recovery of a tax benefit.
E)All of the above items appear on Schedule K.

Question 65

Which, if any, of the following can be eligible shareholders of an S corporation?

A)A partnership.
B)A nonresident alien.
C)A voting trust.
D)The estate of a deceased shareholder.

Question 66

What statement is correct with respect to an S corporation?

A)There is no advantage to elect § 1244 stock.
B)An S corporation can own up to 85% of an insurance company.
C)A resident alien may be a shareholder.
D)A voting trust arrangement is not available.
E)None of the above statements is true.

Question 67

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

A)Net sales.
B)Cost of goods sold.
C)Dividends received.
D)Depreciation recapture.

Question 68

What statement is correct with respect to an S corporation?

A)There are now more LLCs than S corporations.
B)S corporation status allows shareholders immediately to realize tax benefits from corporate losses.
C)An S corporation is prohibited from being a member of an affiliated group.
D)An LLP may own stock in an S corporation.
E)None of the above statements is correct.

Question 69

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

A)Any method agreed to by all of the shareholders.
B)Per-day allocation.
C)FIFO method.
D)LIFO method.
E)Some other method.

Question 70

Which statement is incorrect with respect to the number-of-shareholders test in filing an S election?

A)Husband Jaime and wife Maria count as one shareholder.
B)Grandmother Adela and granddaughter Maria count as one shareholder.
C)Husband Jaime and the estate of wife Maria count as one shareholder.
D)Husband Jaime and ex-wife Isabel count as one shareholder.
E)None of the above statements is incorrect.

Question 71

Which statement is correct with respect to filing an S election?

A)Form 2553 must be filed.
B)All shareholders must consent.
C)The election may be filed in the previous year.
D)An extension of time is available for filing Form 2553.
E)All of the above statements are correct.

Question 72

Which, if any, of the following can be eligible shareholders of an S corporation?

A)A Roth IRA.
B)Partnership.
C)A non-U.S. corporation.
D)A nonqualifying trust.
E)None of the above can own stock.

Question 73

If an S corporation's beginning balance in OAA is zero, and the following transactions occur, what is the ending OAA balance? $$\begin{array} { l r } \text { Depreciation recapture income } & \$ 21,000 \\\text { Payroll tax penalty } & 4,200 \\\text { Tax-exempt interest income } & 5,300 \\\text { Nontaxable life insurance proceeds } & 5,100 \\\text { Life insurance premiums paid (nondeductible) } & 2,800\end{array}$$ ?

A)$1,300
B)$7,600
C)$23,300
D)$27,500
E)None of the above

Question 74

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

A)Tax-exempt interest income.
B)Section 1231 gain.
C)Section 179 depreciation deduction.
D)Depreciation recapture income.
E)All of the above appear on Schedule K.

Question 75

Which item has no effect on an S corporation's AAA?

A)Stock purchase by a shareholder.
B)Interest expense.
C)Cost of goods sold.
D)Capital loss.
E)All of the above modify AAA.

Question 76

Several individuals acquire assets on behalf of Skip Corporation on May 28, purchased assets on June 3 and began business on June 11. They subscribe to shares of stock, file articles of incorporation for Skip, and become shareholders on June 21. The S election must be filed no later than 2 1/2 months after:

A)May 28.
B)June 3.
C)June 11.
D)June 21.
E)December 31.

Question 77

A new S corporation shareholder can revoke the S election unilaterally, if he/she owns how much of the existing S corporation's stock?

A)More than 50%.
B)50% or more.
C)The election can be revoked only if all of the shareholders consent.
D)The election cannot be revoked during the first year of the new shareholder's ownership.

Question 78

An S corporation must possess which of the following characteristics?

A)Not more than one hundred shareholders.
B)Corporation organized in the U.S.
C)Only one class of stock.
D)All of the above are required of an S corporation.
E)None of the above are required of an S corporation.

Question 79

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

A)A consent extension is available only if Form 2553 is filed on a timely basis, reasonable cause is given, and the interests of the government are not jeopardized.
B)Both husband and wife must consent if one owns the stock as community property.
C)An S election requires a consent from all of the S corporation's shareholders.
D)A consent must be in writing.
E)None of the above statements is incorrect.

Question 80

Which could constitute a second class of stock?

A)Treasury stock.
B)Phantom stock.
C)Unexercised stock options.
D)Warrants.
E)None of the above.