Question 1

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 concerning distributions and the potential for double taxation, than S corporations without such earnings and profits.

Question 2

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

Accepted Answer

An S corporation can use a non-calendar year-end if it can establish a business purpose for an alternative year-end. This can allow the corporation to better align its fiscal and tax year with its business activities. However, the business purpose must be valid and bona fide, and the corporation must receive approval from the IRS for the alternative year-end.

Question 3

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 two acceptable methods are the specific identification method and the daily method.

Question 4

Publicly traded corporations cannot be treated as S corporations.

Accepted Answer

According to the federal tax law, S corporations cannot have more than 100 shareholders and cannot have any nonresident alien shareholders. Therefore, publicly traded corporations, which can have thousands or even millions of shareholders, cannot meet this criteria and cannot be treated as S corporations.

Question 5

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

Accepted Answer

S corporations may have no more than 100 shareholders; family members and their estates count as one.

Question 6

Like partnerships and C corporations, S corporations face the same restrictions on using the cash method of accounting.

Accepted Answer

S corporations generally have more flexibility in using the cash method of accounting compared to C corporations, which are often required to use the accrual method if they meet certain criteria.

Question 7

Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations.

Accepted Answer

Both S corporations and C corporations offer limited liability protection to their owners, meaning that the owners' personal assets are generally protected from the corporation's debts and legal obligations.

Question 8

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

Accepted Answer

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

Question 9

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

Accepted Answer

All shareholders on the date of the election must consent to the election.

Question 10

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 IRS, differences in voting powers are allowed as long as the shares have equal distribution and liquidation rights. This means that all shareholders are entitled to the same percentage of profits and assets upon liquidation, regardless of their voting power.

Question 11

Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. but Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent.

Accepted Answer

According to the IRS, a majority shareholder (more than 50%) has the authority to terminate the S corporation status without the consent of other shareholders. Since Bobby T owns 75% of DJ, Inc., he can terminate the S corporation status without Dallas' consent.

Question 12

An S corporation election may be voluntarily or involuntarily terminated.

Accepted Answer

An S corporation election can be voluntarily terminated by a shareholder vote or by filing a statement with the IRS. It may also be involuntarily terminated by the IRS if the corporation no longer meets the eligibility requirements or fails to meet certain tax-related obligations.

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 corporation must wait until the beginning of the fifth year to elect S corporation status again.

Question 14

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 shareholders must hold more than 50 percent of the stock to make a voluntary revocation.

Question 15

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

Accepted Answer

The same rules for forming and contributing property govern S and C corporations.

Question 16

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

Accepted Answer

According to IRS regulations, if an S corporation shareholder sells her stock to a nonresident alien, it will terminate the S election. This is because S corporations are only allowed to have certain types of shareholders, including individuals, estates, and certain types of trusts. Nonresident aliens are not eligible to be S corporation shareholders.

Question 17

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, regardless of whether it had previously operated as a C corporation or not.

Question 18

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 amount is 25 percent of gross receipts for three consecutive years.

Question 19

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

Correct, the specific identification method is a permissible method for allocating income in short tax years resulting from an involuntary S election termination.

Question 20

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within 3½ months after the beginning of the year.

Accepted Answer

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

Quiz 11: S Corporations