Question 1

A distribution from the other adjustment account (OAA) is not taxable to an S shareholder.

Accepted Answer

Distributions from the Other Adjustment Account (OAA) are not taxable to S corporation shareholders. The OAA is created when an S corporation has previously been a C corporation and has accumulated earnings and profits (E&P). The OAA is used to adjust the S corporation's accumulated adjustments account (AAA) for E&P that was not previously recognized by the S corporation. When the S corporation makes a distribution from the OAA, it is treated as a return of capital and is not taxable to the shareholders.

Question 2

A corporation can revoke its S election as of a future date.

Accepted Answer

A corporation can revoke its S election by filing Form 2553 with the IRS. The revocation can take effect as of a future date specified on the form.

Question 3

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

Accepted Answer

NOL (Net Operating Loss) carryforwards from years in which the corporation was taxed under subchapter C (C corporation) cannot be used in years after the corporation has elected to be taxed as an S corporation, because S corporations pass their income, deductions, and credits through to their shareholders, and do not themselves pay income tax on their earnings.

Question 4

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

Accepted Answer

S corporation status allows shareholders to pass through corporate losses to their personal tax returns, allowing them to offset other income and reduce their overall tax liability. This benefit is available immediately, assuming the shareholder has sufficient stock basis.

Question 5

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

Accepted Answer

In an S corporation, only certain types of liabilities affect the owner's basis, while in a partnership all liabilities, including recourse and nonrecourse, affect the owner's basis.

Question 6

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

Accepted Answer

An S election must be made after the company has elected to become a corporation, and it can be effective for the tax year in which the election is made if it is done by the 15th day of the 3rd month of the corporation's tax year.

Question 7

The AAA begins with a zero balance on the first day of an S corporation's first tax year.

Accepted Answer

The accumulated adjustments account (AAA) starts with a zero balance on the first day of the S corporation's first tax year. As the S corporation earns income and incurs expenses, the AAA is adjusted accordingly.

Question 8

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

Accepted Answer

S corporation tax-exempt income flows through to the shareholder and retains its tax-exempt status, not becoming taxable income to the shareholder.

Question 9

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

Accepted Answer

This is a true statement according to the Internal Revenue Service (IRS) regulations for S corporations. The rules that are not specified for S corporations are governed by the rules for C corporations, as stated in IRS regulations under section 1361 of the Internal Revenue Code.

Question 10

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

Accepted Answer

The answer of Distributions of appreciated property by an S...

Question 11

A newly formed S corporation does not receive any tax benefit from a C corporation's NOL incurred in its first election tax year.

Accepted Answer

The answer of A newly formed S corporation does not...

Question 12

An estate may be a shareholder of an S corporation.

Accepted Answer

An estate can be a shareholder of an S corporation. However, it is important to note that the estate must meet certain eligibility requirements, such as being a qualified trust or electing to be treated as an estate under IRS rules.

Question 13

A one-person LLC can be a shareholder of an S corporation.

Accepted Answer

An S corporation allows for a maximum of 100 shareholders, and there are no restrictions on who those shareholders can be. This means that even a one-person LLC can be a shareholder of an S corporation.

Question 14

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

Accepted Answer

S corporations have strict ownership rules, including that all shareholders must be individuals (with certain exceptions like trusts and estates), and cannot be partnerships or corporations, thus a limited liability partnership (LLP) cannot own stock in an S corporation.

Question 15

A former spouse is treated as being in the same family as the individual to whom he or she was married for purposes of determining the number of S corporation shareholders.

Accepted Answer

This is true according to the IRS rules for determining the number of S corporation shareholders.

Question 16

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

Accepted Answer

The answer of An S corporation cannot incur a tax...

Question 17

An S corporation's AAA can have a negative balance.

Accepted Answer

An S corporation's accumulated adjustments account (AAA) can have a negative balance if the corporation has had more losses than profits in past years or if distributions have exceeded profits in the current year.

Question 18

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

Accepted Answer

An S election is made by filing Form 2553 with the IRS.

Question 19

A corporation may alternate between S corporation and C corporation status each year depending on which results in more tax savings.

Accepted Answer

A corporation cannot freely alternate between S corporation and C corporation status each year due to the IRS rule that requires a corporation to wait five years after terminating S corporation status before it can elect S corporation status again, unless the IRS consents to an earlier election.

Question 20

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

Accepted Answer

According to IRS regulations, if a shareholder who is a resident alien moves outside the United States, the corporation can no longer qualify for S corporation status and the S election is terminated.

Quiz 15: S Corporations