Deck 15: S Corporations

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

S corporations are treated as partnerships under state property laws.

Question 9

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

Question 10

An S corporation cannot be a shareholder in another corporation.

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

An estate may be a shareholder of an S corporation.

Question 16

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

Question 17

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

Question 18

Most IRAs cannot own stock in an S corporation.

Question 19

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

Question 20

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

Question 21

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 22

An S corporation may not amortize its organization expenses.

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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 29

A distribution from OAA is taxable.

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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 36

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

Question 37

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

Question 38

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

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

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 41

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 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

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

Question 48

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 49

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

Question 50

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

Question 51

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 52

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 53

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 54

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

Question 55

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

Question 56

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

Question 57

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 58

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

Question 59

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 60

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

Question 61

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 62

Which transaction affects the Other Adjustments Account on an S corporation's Schedule M-2?

A)Payroll penalty.
B)Unreasonable compensation.
C)Life insurance proceeds (nontaxable to the recipient S corporation).
D)Taxable interest.
E)None of the above affects the OAA.

Question 63

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 64

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 65

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 66

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 67

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 68

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 69

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.

Question 70

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 71

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 72

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 73

Which, if any, of the following items decreases an S corporation's AAA?

A)Section 1231 loss.
B)Expenses related to tax-exempt income.
C)Depletion in excess of basis.
D)Distribution from earnings and profits.
E)None of the above affects the AAA.

Question 74

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 75

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 76

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 77

If an S corporation's beginning balance in OAA is zero, and the following transactions occur, what is the ending OAA balance?
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A)$1,300
B)$7,600
C)$23,300
D)$27,500
E)None of the above

Question 78

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 79

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 80

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.