Question 1

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

Accepted Answer

This statement is true. S corporations make accounting decisions at the entity level, just like partnerships.

Question 2

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

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. This is true according to the IRS guidelines. The corporation would generally have to wait until the beginning of the third tax year after the tax year in which it terminated or voluntarily revoked its S corporation status before it can elect it again.

Question 3

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

As a 75% owner, Bobby T has the majority control and can make decisions regarding the termination of S corporation status without the consent of the minority owner, Dallas.

Question 4

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, such as to align with the fiscal year of its shareholders or to better match its operational cycle, for an alternative year-end.

Question 5

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 December 31 year-end to align with the tax year of their individual shareholders, unless they meet specific exceptions that allow for a different fiscal year.

Question 6

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 can result in a tax-free transaction under certain conditions (IRC Section 721), whereas contributing property to an S corporation may result in taxable gain if the transaction does not meet specific requirements (IRC Section 351).

Question 7

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 fear of involuntary termination as long as it has not operated as a C corporation. This is known as the "passive income exception." An S corporation can have passive investment income without fear of an involuntary S election termination as long as it never operated as a C corporation.

Question 8

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

Accepted Answer

According to IRS rules, if an S corporation shareholder sells his or her shares to a nonresident alien, the corporation will lose its S status and will be treated as a C corporation. Therefore, the statement is true. According to the IRS, if an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election. This is because nonresident aliens are not allowed to be S corporation shareholders.

Question 9

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 specific identification method is a valid method for allocating income in short S corporation tax years resulting from an involuntary termination of S status.

Question 10

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 generally associated with allocating income and deductions for tax purposes, but an involuntary S corporation election termination typically involves specific IRS rules and procedures for handling the termination and its tax implications, not these allocation methods. These methods are more commonly related to inventory accounting or other specific income allocation scenarios, not directly to S corporation status changes.

Question 11

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

This is known as the "passive income test" and is one of the qualifications for S corporation status. If an S corporation fails this test for three consecutive years, it will lose its S corporation status and be treated as a regular C corporation for tax purposes. This statement is true. When an S corporation has passive investment income that exceeds 20% of its gross receipts for three consecutive tax years, its S election is automatically terminated, and it becomes a regular C corporation.

Question 12

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 consent to the S election for it to be valid. Therefore, without Dallas's consent, Bobby T cannot elect S status for DJ, Incorporated. According to the rules for S corporations, all shareholders must agree to elect S corporation status. Since Dallas does not want to elect this status, Bobby T cannot proceed with the election without his consent.

Question 13

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

This statement is true. According to IRS rules, an S corporation can make a voluntary revocation of its S election if all shareholders who own stock on the date of the revocation consent to the revocation. If the S corporation has more than 100 shareholders, then the consent of more than 50% of the outstanding shares is required. However, if shareholders holding more than 25% of the S corporation stock (including nonvoting shares) agree, then the revocation can still take place. This is correct as per the IRS rules.

Question 14

An S corporation election may be voluntarily or involuntarily terminated.

Accepted Answer

An S corporation election can be voluntarily or involuntarily terminated.

Question 15

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

Accepted Answer

S corporations are pass-through entities like partnerships, and therefore must follow the same rules regarding accounting methods. The cash method is generally not allowed for businesses with over $25 million in gross receipts, except for certain specified industries. S corporations are pass-through entities, which means that their profits and losses are passed through to the shareholders who report them on their individual tax returns. Like partnerships and C corporations, S corporations are generally required to use the accrual method of accounting unless they meet certain criteria for using the cash method.

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 is true according to the rules of S corporations. While voting powers can differ between shares, those shares must have identical distribution and liquidation rights in order to maintain S corporation status.

Question 17

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 18

Publicly traded corporations cannot be treated as S corporations.

Accepted Answer

Publicly traded corporations are required to meet certain criteria and follow specific regulations, and cannot be treated as S corporations under the Internal Revenue Code. S corporations are limited to certain shareholders and have different tax treatment than regular corporations.

Question 19

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

To make the election effective as of the beginning of the current year, Form 2553 must be filed within the first two months and fifteen days of the beginning of the year. In case the corporation misses the deadline, the election can be made effective for the next tax year. This is correct, according to the IRS, in order for an S corporation to be effective as of the beginning of the current year, Form 2553 must be filed within three and a half months of the start of the year.

Question 20

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

Accepted Answer

This statement is true. S corporations are limited to having no more than 50 shareholders, but family members are allowed to be treated as a single shareholder. This helps to ensure that family-owned businesses are not penalized for their structure. This statement is true. S corporations are limited to having no more than 50 shareholders, but members of the same family are treated as a single shareholder for the purpose of the shareholder limit. This allows families to own and operate a business as an S corporation without having to worry about exceeding the shareholder limit.

Quiz 11: S Corporations