Question 1

An S corporation election may be voluntarily or involuntarily terminated.

Accepted Answer

An S corporation election may be voluntarily and involuntarily terminated.

Question 2

If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

Accepted Answer

An S corporation can earn passive investment income without risking an involuntary termination of its S election, as long as it has always been an S corporation and never operated as a C corporation.

Question 3

The same exact requirements for forming and contributing property govern S corporations and partnerships.

Accepted Answer

S corporations and partnerships are governed by different sets of tax rules and regulations regarding the formation, operation, and contribution of property. For example, the rules for contributing property to a partnership in exchange for an interest are found under IRC Section 721, while contributions to S corporations are governed by IRC Section 351, each with its own specific requirements and implications.

Question 4

Bobby T (75percent owner) would like to terminate the S corporation status of DJ, Incorporated, but Dallas (5percent owner) does not want to terminate S corporation status. Bobby T can terminatethe Scorporation status for DJ, Incorporated, without Dallas's consent.

Accepted Answer

According to the rules of S corporations, a 75 percent or greater owner can make the decision to terminate the S corporation status without the consent of other owners. Therefore, Bobby T can terminate DJ, Incorporated's S corporation status even if Dallas does not agree.

Question 5

Publicly traded corporations cannot be treated as S corporations.

Accepted Answer

This is because S corporations have restrictions on size and ownership, which do not apply to publicly traded corporations.

Question 6

The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

Accepted Answer

S corporations with earnings and profits from prior C corporation years face more complex rules, particularly regarding distributions and the potential for double taxation, than S corporations without such earnings and profits.

Question 7

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

Accepted Answer

According to the IRS, if an S corporation shareholder sells her stock to a nonresident alien, it will terminate the S election automatically. This is because nonresident aliens are not eligible to be shareholders of an S corporation.

Question 8

SoTired, Incorporated, a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Incorporated, will continue to use a June 30 year-end as an S corporation.

Accepted Answer

S corporations are generally required to adopt a calendar year-end unless they can establish a business purpose for a different fiscal year or meet one of the exceptions that allow for a fiscal year. Since SoTired, Incorporated, is converting from a C corporation to an S corporation, it would typically need to change to a calendar year-end unless it qualifies for an exception.

Question 9

An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

Accepted Answer

The answer of An S corporation can make a voluntary...

Question 10

An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

Accepted Answer

The answer of An S election is terminated if the...

Question 11

Bobby T (95percent owner) would like to elect S corporation status for DJ, Incorporated, but Dallas (5percent owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Incorporated, without Dallas's consent.

Accepted Answer

According to IRS regulations, all shareholders of a corporation must unanimously elect to apply for S corporation status. If even one shareholder disagrees, the corporation cannot elect S corporation status. Therefore, Bobby T cannot elect S status for DJ, Incorporated, without Dallas's consent.

Question 12

S corporations face the same restrictionsas partnerships and C corporations on using the cash method of accounting.

Accepted Answer

S corporations, unlike C corporations and partnerships with C corporation partners, generally do not face restrictions on using the cash method of accounting unless they have inventory.

Question 13

After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.

Accepted Answer

The answer of After terminating or voluntarily revoking S corporation...

Question 14

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Accepted Answer

The specific identification method and monthly allocation method are not specifically related to S corporations for allocating income across short tax years due to involuntary S election termination. These methods are more commonly associated with inventory management or other accounting practices, not with the specific scenario of S corporation income allocation due to involuntary termination of S election status. S corporations typically follow IRS rules and regulations for income allocation in such scenarios, which involve pro-rata allocation based on the number of days in each short tax year.

Question 15

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Accepted Answer

The statement accurately describes the specific identification method for S corporations.

Question 16

Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.

Accepted Answer

This statement is true according to the rules for S corporations. Different classes of stock are not permitted in S corporations, but variations in voting power among shares are allowed as long as those shares have identical distribution and liquidation rights.

Question 17

Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.

Accepted Answer

S corporations, like partnerships, are pass-through entities and make entity-level accounting period and method elections.

Question 18

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year.

Accepted Answer

The answer of To make an S election effective as...

Question 19

An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end.

Accepted Answer

An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end, such as matching the year-end of a related entity or aligning with a seasonal business cycle. Otherwise, the S corporation must use a calendar year-end.

Question 20

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

Accepted Answer

S corporations are limited to 100 shareholders, and family members can be treated as a single shareholder under specific conditions, but the general rule for the maximum number of shareholders is 100, not 50.

Quiz 11: S Corporations