Deck 11: S Corporations

Question 1

Reasonable employee benefits provided by an S corporation for a shareholder who is an employee are deductible business expenses by the S corporation and are excluded from the income of the shareholders.(The business was incorporated January 1 of the current year.)

Answer 1

False

Question 2

An S corporation issues two classes of common stock: class A voting and class B nonvoting stock.The rights of both classes of stock are identical except for voting rights.The S corporation election will not be valid because more than one class of stock is outstanding.

Answer 2

False

Question 3

If proper elections are made, any corporation may qualify as an S corporation.

Answer 3

False

Question 4

Reasonable salaries paid to an S corporation's shareholders who are employees are deductible business expenses.(The business was incorporated January 1 of the current year.)

Question 5

In situations where a parent wants to involve minor children in the business, the general partnership form is probably preferable to the S corporate form.

Question 6

An S corporation on the accrual basis may deduct expenses owed to a cash basis owner before the amount is paid.

Question 7

The consent of all shareholders who have held stock during the portion of the taxable year prior to revoking S corporation status is required for the S corporation status to be inapplicable for the taxable year, even if the election is filed timely.

Question 8

Even though an S corporation was formerly a C corporation, all of its cash distributions can be confidently treated as nontaxable if there is no AEP from its C corporation years and the distribution does not exceed the shareholder's basis in the S stock.

Question 9

H Company, an S corporation owned by A, B, and C, voluntarily terminated its S election and became a C corporation.One year later, A sold his one-third interest in the corporation to D.B, C, and D may re-elect S corporation status at this time, without permission from the IRS, since there has been a partial change in ownership.

Question 10

Although an S corporation is taxed much like a partnership, it is subject to many of the C corporation rules.

Question 11

A shareholder has capital gain only to the extent that S corporation distributions to him exceed his basis in the stock plus the amount of corporate debt owed to him.

Question 12

P holds stock in an S corporation as custodian for her five minor children.For purposes of counting shareholders, the entire family is one shareholder.

Question 13

For determining the number of shareholders in an S corporation, stock owned by a husband and wife is treated as owned by one shareholder.

Question 14

An S corporation election is disqualified if its passive investment income exceeds 25 percent of its gross receipts during any taxable year.

Question 15

The consent of all shareholders who have held stock during the pre-election portion of the taxable year is required in order for the election of S corporation status to be effective for that taxable year, even if the election is filed timely.

Question 16

Unlike partnerships, some S corporations are assessed taxes on certain types of income and/or gains.

Question 17

Either the per day or interim closing of books method may be used to allocate S corporation items among shareholders for any ownership interest change during the taxable year.

Question 18

The S years are counted when determining the expiration period of a net operating loss carryover from a C corporation.

Question 19

An S corporation has 300 shares of outstanding stock.K owns 250 shares and U owns 50 shares.On June 30 of this year, K sells 200 of his shares to M.M may cause revocation of the S corporation election.

Question 20

When an owner's share of S corporation losses exceeds the owner's basis in the corporation, all ordinary losses flow through to the owner before capital losses flow through.

Question 21

An S corporation has the following information for its taxable year: Net ordinary income before the items below are considered $65,000 $$\begin{array} { l l } \text { Salary to Z } & ( 18,000 ) \\\text { Rental income } & 22,000 \\\text { Rental expenses } & ( 29,000 ) \\\text { Net income } & \$ 40,000\end{array}$$ Z, a 50 percent owner, performs services for the business.Z's self-employment income from the corporation, which is subject to self-employment tax, is

A)$0
B)$18,000
C)$41,500
D)$23,500
E)$38,000

Question 22

An S corporation shareholder's basis may be affected by some or all business liabilities

A)Never
B)Because the basis is increased by the amount of debt directly owed by the S corporation to the particular shareholder when there is a net loss allocated to that shareholder
C)Because the basis is increased by the shareholder's share of all business liabilities
D)When there is AEP from C corporation years

Question 23

Z owns five of an S corporation's 100 shares of common stock outstanding.After holding the stock 73 days during the taxable year, Z sells all five shares.S corporate records for the year show taxable income to be $200,000.If no special election is made, Z's includible share of taxable income from the S corporation is

A)$2,000
B)$10,000
C)Not able to be determined from the information provided in the problem because the interim closing of books method must be used
D)Not able to be determined from the information provided in the problem because the per-day allocation method must be used

Question 24

A calendar year business was operated as a C corporation from 1998 through 2006, and as an S corporation since January, 2007.Its account balances at the end of 2011 are 1998-06 accumulated earnings and profits $\quad$$\$ 3,000$
2007-10 accumulated adjustment account $\quad$ 2,000
2011 net ordinary income $\quad$$\quad$ 5,000
2011 cash distributions to $\mathrm { G } \quad 12,000$ G, the sole shareholder, had a basis in her stock of $4,000 at the beginning of 2011.G is single and has no other tax information.G's A.G.I.is

A)$12,000
B)$10,800
C)$8,000
D)$2,900
E)Some other amount, which is $____________

Question 25

Contributions of property in exchange for S corporate stock are nontaxable only if

A)On the date of exchange there is no real difference between the value of the property given and the stock taken back.
B)The persons involved in the transaction own at least 80 percent of the S corporation when the transfer is completed.
C)The S corporation is a not-for-profit organization.
D)Both the corporation and the persons involved in the transaction agree that the tax will not be recognized at this time and a copy of that agreement is filed with the corporation's tax return.

Question 26

An S corporation has C corporation accumulated earnings and profits.To guard against termination of S status, the corporation might

A)Capitalize the C corporation AEP.
B)Elect to treat the C corporation AEP as S corporation AEP at the time it files Form 2553.
C)Distribute the C corporation AEP and remove any threat of termination due to passive investment income, whether significant or not.
D)None of the above

Question 27

Y, an S corporation formed at the beginning of the year, has the following information in its first year: $\begin{array}{lr}\text { Gross Income from services } & \$ 100,000 \\\text { Net short-term capital loss } & (2,200) \\\text { Salary paid to F } & (10,000) \\\text { Medical insurance premium for F } & (300) \\\text { Other operating expenses } & (54,000) \\\text { Cash distributions to F } & 5,000\end{array}$ F, a 50 percent owner of Y, is single and has no other tax information.F's A.G.I.is

A)$21,900
B)$26,750
C)$26,900
D)$35,700
E)Some other amount, which is $__________________

Question 28

The election for T, a calendar year S corporation, is terminated on May 1, 2011.Select the best answer.

A)Form 1120 must be filed for T to cover 2011
B)Form 1120S must be filed for T to cover 2011
C)Form 1120S must be filed for the first four months and Form 1120 must be filed for the last eight months for T to cover 2011
D)A special Form 1120CS must be filed for T to cover 2011

Question 29

Which of the following events does not automatically terminate an S corporation election?

A)One of the corporation's 100 shareholders transfers his shares to three unrelated friends.
B)The corporation issues a nonvoting preferred class of stock that entitles the holder to receive a greater amount on liquidation.
C)51 percent of the shareholders consent to file a revocation.
D)One of the corporation's 100 shareholders marries and transfers half of her shares to her husband.

Question 30

H, an S corporation, has net ordinary income from sales of its products of $5,000.During the year, H distributes $12,000 cash to P, its sole shareholder.P's basis in H stock, before the net ordinary income and cash distribution are considered, is $4,000 and H owes P $2,000.H has been an S corporation since it was formed.P has includible income from H of

A)$5,000 ordinary income and $6,000 capital gain
B)$5,000 ordinary income and $3,000 capital gain
C)$5,000 ordinary income and $1,000 capital gain
D)$11,000 ordinary income and zero capital gain
E)$8,000 ordinary income and zero capital gain

Question 31

The purpose of the Schedule K-1 (Form 1120S) is to report

A)Information for the AAA, PTI, and other adjustment accounts
B)Any tax liability of the S corporation from excessive passive investment income and built-in gains
C)The shareholder's allocation of the distributive items summarized on Schedule K (Form 1120S)
D)Investment tax credit recapture for assets acquired by the corporation when it was operated as a C corporation

Question 32

H Company, a calendar year S corporation incorporated in 2007, showed the following taxable income and distributions: $$\begin{array}{l}&\text { Taxable Income from Earnings }&\text { Distributions }\\2007 & \$ 50,000&\$ 35,000 \\2008 & 55,000&35,000 \\2009 & 60,000&25,000 \\2010 & 60,000&35,000 \\2011 & 40,000&50,000 \\\text { Total } & \$ 265,000 & \$ 180,000\end{array}$$ The company has had a single shareholder since January 1, 2007, and his basis in the stock on that date was $0.The shareholder has no receivables from the corporation.Based on the figures above, how has the shareholder's basis changed?

A)Decreased $180,000
B)Increased $265,000
C)Increased $75,000
D)Increased $85,000

Question 33

H is a newly incorporated S corporation in the business of growing Christmas trees from seedlings.Tax planning considerations are important to the owners.Which of the following choices is likely to be the most advantageous as a taxable year, if the owners expect net losses in the early years:

A)The calendar year
B)The business year that coincides with that of the owners who hold a majority of the stock
C)A business year that ends Jan.31 if the owners file individually using the calendar year
D)A fiscal year that ends with the S corporation's natural business year

Question 34

An S corporation incurs a net operating loss of $25,000 in the current year and makes no distributions.Its sole shareholder, K, has a basis in the stock of $30,000 and in a note receivable from the corporation of $20,000.The $25,000 has the following impact:

A)None, since no distributions were made
B)Reduces the stock basis by $25,000
C)Reduces the note basis by $20,000 and the stock basis by $5,000
D)Reduces the note basis by $10,000 and the stock basis by $15,000

Question 35

The following information is available for an S corporation: $\begin{array} { l }&\text { Basis }&FMV\\\text { Cash }&\$120,000&\$120,000\\\text { Equipment }&160,000&160,00\\\text { Equity accounts }&\$180,000&\$300,000\end{array}$
X buys Y's one-third of the shares for $100,000.Y's basis is $60,000, and she recognizes $40,000 gain.What is X's share of the inside basis in the corporation's net assets?

A)$60,000
B)$140,000
C)$100,000
D)$160,000

Question 36

An S corporation election may be terminated if the corporation has excessive passive investment income.An example of what is not passive investment income is

A)Dividends from a corporation of which the S corporation owns 50% of the stock
B)Gross receipts from an annuity
C)Rental income form a net lease
D)Interest on notes not involving the sale of inventory
E)Room rents paid to a hotel

Question 37

A business is considered a small business corporation for S corporation eligibility purposes if certain conditions are met.Those conditions include all of the following except

A)Must be an eligible domestic corporation
B)Have income of $1 million or less
C)Have only one class of stock outstanding
D)Have no more than 100 eligible shareholders

Question 38

Which one of the following qualifies as an eligible corporation for S corporation purposes?

A)A foreign corporation
B)A domestic corporation that owns 80 percent of another corporation
C)A life insurance company
D)None of the above

Question 39

Z Corp elected S corporation status when it was formed.It purchased land for $15,000 and constructed a warehouse to store inventory for its business.During the past taxable year, Z distributed the warehouse and land, valued at $200,000, to its shareholders.The original cost to construct the building was $120,000, and straight-line depreciation of $100,000 has accumulated.The values are allocated as follows: $$\begin{array}{l}&\text { Fair Market Value }&\text { Adjusted Basis }&\text { Appreciation }\\\text { Land } & \$ 60,000 & \$ 15,000 & \$ 45,000 \\\text { Building } & 140,000 & 20,000 & 120,000 \\\text { Total } & \$ 200,000 & \$ 35,000 & \$ 165,000\end{array}$$ Assuming sufficient AAA, what is the effect on the shareholders' bases for this distribution?

A)$35,000 increase
B)$165,000 increase
C)$35,000 decrease
D)$200,000 decrease

Question 40

Stock of an S corporation may be owned by all of the following except

A)An individual who is a resident alien of the United States
B)An estate
C)A domestic partnership
D)A voting trust

Question 41

R, a C corporation for 2001-10 qualifies as an S corporation throughout 2011.Its net income for 2011 is $$\begin{array} { l r } \text { Dividend income } & \$ 30,000 \\\text { Gross sales } & 70,000 \\\text { Cost of goods sold } & ( 45,000 ) \\\text { Operating expenses } & ( 50,000 ) \\\text { Net income } & \$ 5,000\end{array}$$ R's AEP from 2001-10 totals $8,000.R's 2011 Federal tax liability is

A)Zero, since it is not subject to the passive investment income tax unless such income exceeds the limit for three consecutive years
B)Zero, since R is an S corporation with a net loss from its active business
C)$1,750, since the tax is assessed at 35 percent on an excess amount
D)$4,500, since a tax on passive investment income is assessed at regular corporate rates
E)Some other answer, which is $__________because_________

Question 42

An S corporation, with no AEP, has net ordinary income from sales of its products of $12,000.The only distribution of profits during the year to L, its sole owner, is land with a market value of $3,000 and a basis of $2,000.L will hold the land as an investment.At the beginning of the year, L's basis in the corporation's stock was $7,500.L's basis in the stock, after all items are considered, is

A)$7,500
B)$16,500
C)$17,500
D)$19,500

Question 43

A calendar year business was operated as a C corporation from 1998 through 2006, and as an S corporation since 2007.Its account balances at the end of 2011 are 1998-06 accumulated earnings and profits $\$ 2,500$
2007-10 accumulated adjustment account 1,000
2011 net ordinary income $\quad$ 2,200
2011 excludable interest income 800
2011 cash distributions to M4,500 M, the sole shareholder, had a basis in his stock of $4,000 at the beginning of 2011.M is single and has no other tax information.M's A.G.I.is

A)$4,500
B)$3,500
C)$2,600
D)$2,200
E)Some other amount, which is $__________________

Question 44

When an S corporation terminates S status, special rules allow it to avoid some of the harsh tax consequences of suddenly becoming a C corporation.Which of the following is not allowed by the post-termination rules?

A)Nontaxable cash distributions may be made from AAA.
B)Nontaxable property distributions may be made from AAA.
C)A shareholder may increase his or her basis in stock.
D)All of the above are allowed.

Question 45

B Corporation elected to convert from C status to S status.B uses the accrual basis.At the time the election takes effect, the records show: $\begin{array} { l }\text { Basis }&FMV&\text { Gain/Loss }\\\text { Inventory }&\$30,000&\$70,000&\$40,000\\\text { Land/Building }&150,000&750,000&600,000\\\text { Trucks }&25,000&15,000&(10,000)\\\text { Total }&\$205,000&\$835,000&\$630,000\end{array}$
B's net unrealized built-in gain is

A)$630,000
B)$635,000
C)$640,000
D)$645,000

Question 46

S corporations may be required to pay all of the following taxes except

A)Payroll taxes on compensation to shareholder-employees
B)Built-in gains tax
C)Personal holding company tax
D)Excessive passive investment income tax
E)LIFO recapture tax

Question 47

The S corporation form is often compared to the partnership form.Though they are similar in many ways, there are significant differences.Which of the following comparative statements is true?

A)S corporations pay income tax on net ordinary income while partnerships do not.
B)Partnership transfers of property to owners are taxable transactions at the partnership level, whereas corporate transfers of property to owners are not taxable to S corporations.
C)Self-employment taxes on a partner's guaranteed compensation are not a deductible expense for the partnership, but FICA taxes on a shareholder's reasonable salary are deductible by the S corporation.
D)A partnership pays tax on capital gains and distributes capital losses to the partners, while an S corporation flows through capital gains and losses to the shareholders.

Question 48

One of the chief reasons for choosing the S corporate form over the general partnership form is that

A)The public has greater trust and respect for businesses operated as corporations.
B)The corporate form, with its three-part structure of shareholders, directors, and management, is a more dynamic business form.
C)The S corporate form is a permitted tax shelter.
D)S shareholders have limited liability.

Question 49

The built-in gains tax (§ 1374) was enacted to

A)Ensure recognition of all gain.
B)Aid beginning corporations that elect S status by deferring the tax on built-in gains for 10 years.
C)Prevent C corporations that were planning distributions of appreciated property from avoiding double taxation by converting to S corporations before making the distributions.
D)Ensure recognition of all gains on the distribution of appreciated property purchased by the S corporation.

Question 50

J and H each have always owned 50 percent of the stock of a calendar-year S corporation that was previously operated as a C corporation.Accounts at the beginning of the current year are shown below: $\begin{array} { l }&\text { Corporate Accounts }&\text { Stock Basis }\\A A A P T I&A E \& P&OAA&J&H\\10,000&\$8,000&\$1,200&0&\$15,000&\$10,000\end{array}$
During the year, operations show tax-exempt interest income of $5,000, net ordinary income of $20,000, and cash distributions of $40,000.What are J and H's stock basis at the end of the year?

A)J = $10,400 H = $5,400
B)J = $ 5,400 H = $ 400
C)J = $8,100H = $3,100
D)J = $ 6,700 H = $1,700

Question 51

F Company is an S corporation.It distributes farm acreage to its sole shareholder, H, whose stock basis before the distribution is $50,000.The corporation's basis in the acreage is $50,000 and the FMV is $200,000.The corporation has no accumulated AEP from C corporation years.After the distribution, H's basis in the stock is

A)$200,000
B)$50,000
C)$0
D)$100,000
E)($100,000)

Question 52

B Corporation elected to convert from C status to S status.B uses the accrual basis.At the time the election takes effect, the records show: $\begin{array} { l }\text { Basis }&FMV&\text { Gain/Loss }\\\text { Inventory }&\$30,000&\$70,000&\$40,000\\\text { Land/Building }&150,000&750,000&600,000\\\text { Trucks }&25,000&15,000&(10,000)\\\text { Total }&\$205,000&\$835,000&\$630,000\end{array}$
In the first taxable year after B became an S corporation, it sold the inventory held by the C corporation for $70,000 and the truck fleet acquired in the C corporation years for $15,000.In the first taxable year as an S corporation, there was no dividend income, and B's taxable income was determined as if it were a C corporation is $50,000.From the C corporation operations, there is NOL carryover of $5,000.For the first taxable year, the top corporate tax rate is 35 percent.B's built-in gains tax for the first taxable year as an S corporation is

A)$15,300
B)$8,750
C)$10,500
D)$17,000