Question 1

S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

Accepted Answer

S corporations are pass-through entities, which means that they do not pay taxes on their income. Instead, the income or loss of the S corporation is passed through to its shareholders who report it on their individual tax returns. When an S corporation liquidates, it distributes its assets to its shareholders in proportion to their ownership interests. The distribution of appreciated and depreciated assets may result in a gain or loss for the S corporation, which is recognized and reported to the shareholders. Therefore, S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

Question 2

The estimated tax payment rules for S corporations generally follow the rules for C corporations.

Accepted Answer

S corporations and C corporations generally follow the same estimated tax payment rules. Both types of corporations are required to pay estimated taxes four times a year if they expect to owe at least $500 in tax for the year. The estimated tax payments are generally based on the corporation's income and deductions for the year.

Question 3

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

Accepted Answer

The answer of If Annie and Andy (each a 30...

Question 4

Which of the following is a requirement to be an S corporation?

Accepted Answer

S corporations must have only one class of stock, allowing for differences only in voting rights. This ensures that all shareholders are treated equally in terms of economic rights.

Question 5

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

Accepted Answer

S corporations that previously were C corporations and use the LIFO (Last-In, First-Out) inventory method are subject to the LIFO recapture tax, not FIFO (First-In, First-Out).

Question 6

During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

Accepted Answer

The answer of During the post-termination transition period, property distributions...

Question 7

Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

Accepted Answer

The built-in gains tax applies only within the first five years after a C corporation elects to become an S corporation, not 15 years after the election.

Question 8

Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

Accepted Answer

All of the listed relatives (brother, great-grandparent, grandchild, and grandparent) are considered family members for the purposes of the S corporation shareholder limit test, meaning none of the choices provided are exceptions to this rule.

Question 9

Suppose a calendar-year C corporation, NewCorp., Inc., was formed on January 1, 2019, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Inc., a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2019. When is the S election effective?

Accepted Answer

The answer of Suppose a calendar-year C corporation, NewCorp., Inc.,...

Question 10

S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the 15th day of the fourth month after the S corporation's year-end.

Accepted Answer

The answer of S corporations are required to file Form...

Question 11

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original 90 shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and two close friends. According to the S corporation shareholder limit rules, how many shareholders does 2hit, Inc., have?

Accepted Answer

The answer of Tone Loc and 89 of his biggest...

Question 12

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

Accepted Answer

The effective date of an S corporation termination is the day before the first day of the tax year if the revocation statement is filed on or before that date. In this case, since the revocation statement was filed on February 10, 2019, the termination would be effective on January 1, 2019 (the day before the first day of the 2019 tax year).

Question 13

When an S corporation distributes appreciated property to all of its shareholders pro rata, the shareholders who receive the distributed property recognize income on their distributive share of the deemed gain.

Accepted Answer

Under IRC Section 311(b), when an S corporation distributes appreciated property to its shareholders, the corporation is deemed to have sold the property at its fair market value. As a result, the shareholders receiving the distributed property will recognize income on their distributive share of the deemed gain.

Question 14

The built-in gains tax does not apply to S corporations that never operated as C corporations.

Accepted Answer

This is true. The built-in gains tax only applies to S corporations that previously operated as C corporations and have built-in gains (i.e. appreciated assets that were held by the C corporation at the time of conversion to an S corporation). S corporations that have never operated as C corporations are not subject to this tax.

Question 15

Which of the following is prohibited from being an S corporation shareholder?

Accepted Answer

C corporations are prohibited from being shareholders in an S corporation.

Question 16

J.D. formed Clampett, Inc., as a C corporation (calendar tax year) with J.D., Granny, and Jethro, Inc. (a C corporation) as shareholders. On January 15, 2019, Jethro, Inc., sold all its shares to Jane Hathaway. On February 28, 2019, Clampett, Inc., filed an S corporation election, with J.D., Granny, and Jane all consenting to the election. What is the earliest effective date of the S election?

Accepted Answer

For an S corporation election to be effective in the current tax year, it must be filed by the 15th day of the 3rd month of the tax year. Since Clampett, Inc., filed the election on February 28, 2019, it missed the deadline for the 2019 tax year. Therefore, the earliest effective date of the S election would be January 1, 2020.

Question 17

Which of the following would not result in an S election termination?

Accepted Answer

The answer of Which of the following would not result...

Question 18

S corporations are required to recognize both gains and losses on nonliquidating distributions of property to shareholders.

Accepted Answer

S corporations are required to recognize gains, but not losses, on nonliquidating distributions of property to shareholders.

Question 19

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

Accepted Answer

This is true according to the IRS. S corporations that were never C corporations or did not have accumulated earnings and profits from prior C corporation years are exempt from the excess net passive income tax.

Question 20

S corporation distributions of cash are not taxable to the shareholder to the extent of the combined stock and debt basis of the shareholder.

Accepted Answer

The answer of S corporation distributions of cash are not...

Quiz 11: S Corporations