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.)

Accepted Answer

Reasonable employee benefits provided by an S corporation to a shareholder who owns more than 2% of the corporation are generally not excluded from the shareholder's income and must be reported as wages.

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.

Accepted Answer

The S corporation election remains valid as long as the differences in the classes of stock pertain only to voting rights. The IRS allows S corporations to have different classes of stock as long as the economic rights (like rights to distributions and liquidation proceeds) are identical.

Question 3

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

Accepted Answer

Not all corporations can qualify as an S corporation due to specific IRS eligibility criteria, including limitations on the number of shareholders (100 or fewer) and the type of shareholders (must be individuals, certain trusts, and estates; cannot be partnerships, corporations, or non-resident alien shareholders).

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.)

Accepted Answer

Reasonable salaries paid to shareholders who are also employees of an S corporation are considered deductible business expenses. It is important for the salaries to be reasonable and on par with industry standards to avoid any issues with the IRS.

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.

Accepted Answer

General partnerships do not provide limited liability protection, which means that minor children could be exposed to unlimited personal liability for the debts and obligations of the business. An S corporation, on the other hand, offers limited liability protection, shielding the personal assets of shareholders (including minor children) from the business's liabilities.

Question 6

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

Accepted Answer

An S corporation on the accrual basis cannot deduct expenses owed to a cash basis owner until the expenses are actually paid, due to the matching principle and IRS regulations.

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.

Accepted Answer

The consent of only those shareholders who hold stock on the day the revocation is made is required, not of all shareholders who have held stock during the portion of the taxable year prior to the revocation.

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.

Accepted Answer

When an S corporation was formerly a C corporation, it is still subject to certain rules regarding its accumulated earnings and profits (AEP) from its C corporation years. However, if there is no AEP, all cash distributions from the S corporation can be treated as nontaxable as long as 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.

Accepted Answer

The IRS requires a waiting period of 5 years after terminating S corporation status before the corporation can re-elect S status, unless the IRS consents to an earlier election. Ownership changes do not affect this requirement.

Question 10

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

Accepted Answer

An S corporation is taxed similarly to a partnership, but it is subject to many of the same rules as a C corporation, such as rules related to the number and type of shareholders, stock ownership restrictions, and distribution of profits and losses.

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.

Accepted Answer

A shareholder can have a capital gain from an S corporation if the distributions exceed their basis in the stock, but the amount of corporate debt owed to him is not typically added to the stock basis for determining capital gains. The basis calculation generally includes the initial investment and adjustments for the shareholder's share of the corporation's income, losses, and distributions, but not the corporate debt owed to them.

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.

Accepted Answer

According to the IRS, for the purposes of counting shareholders in an S corporation, a shareholder who holds stock as a custodian for a minor is treated as a shareholder, but the minor is not counted as a separate shareholder. Therefore, in this scenario, the entire family is considered 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.

Accepted Answer

According to IRS regulations, for determining the number of shareholders in an S corporation, stock owned by a husband and wife is treated as one shareholder. This is because the law considers a husband and wife as a single economic unit for tax purposes.

Question 14

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

Accepted Answer

The answer of An S corporation election is disqualified if...

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.

Accepted Answer

This is correct according to IRC Section 1362(a)(2)(B). All shareholders who held stock during any portion of the taxable year prior to the effective date of the S corporation election must consent to the election, 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.

Accepted Answer

S corporations can be subject to taxes on certain types of income and gains, such as passive income, excessive net passive income, and built-in 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.

Accepted Answer

The answer of Either the per day or interim closing...

Question 18

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

Accepted Answer

The S years (years in which the corporation is an S corporation) are counted in the 20-year expiration period for 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.

Accepted Answer

An S corporation can have a maximum of 100 shareholders. If M is an ineligible shareholder or if the total number of shareholders exceeds 100, it could cause the S corporation election to be revoked.

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.

Accepted Answer

The owner can only deduct losses up to the extent of their basis in the S corporation. Any losses exceeding their basis cannot be deducted in the current year, regardless of whether they are ordinary or capital losses.

Quiz 11: S Corporations