Question 1

Unlikein partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

Accepted Answer

In partnerships, a shareholder's basis cannot be reduced below zero, while in S corporations, it can be reduced below zero due to adjustments such as losses or deductions in excess of basis. In partnerships, a shareholder's basis cannot be reduced below zero, but in S corporations it is possible for adjustments to decrease a shareholder's basis below zero. This negative basis can result in taxable income being allocated to the shareholder without any actual distribution of cash or property.

Question 2

An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.

Accepted Answer

An S corporation shareholder's initial basis is calculated in the same way as a C corporation shareholder's initial basis. The shareholder's initial basis is the amount the shareholder initially paid for the stock plus any additional contributions made to the corporation. An S corporation shareholder's initial basis is calculated similarly to a C corporation shareholder. This includes any contributions of cash, property, or services, as well as any loans made to the corporation by the shareholder.

Question 3

S corporation losses allocated to a shareholderthat are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization.

Accepted Answer

This is true according to the IRS guidelines. S corporation losses that are not deductible due to basis limitations are carried forward by the shareholder and can be used to offset future taxable income or capital gains. This is correct, S corporation losses that are not deductible in the current year due to the tax-basis limitation rules can be carried forward by the shareholder to future years for potential utilization. This allows the shareholder to potentially offset future income with the carried-over losses.

Question 4

For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder isgoverned by rules very similar to the rules for partnerships.

Accepted Answer

S corporations and partnerships are both pass-through entities and are taxed similarly on distributions to shareholders/partners. Therefore, the taxation of cash distributions to the shareholder in S corporations without prior C corporation earnings and profits is governed by rules very similar to the rules for partnerships.

Question 5

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

Accepted Answer

S corporations are required to follow certain tax rules that apply to C corporations, including the deduction of qualifying employee fringe benefits such as health insurance, retirement plans, and certain fringe benefits. However, S corporations are also treated like partnerships in that their income and deductions are passed through to the shareholders and reported on their individual tax returns.

Question 6

Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

Accepted Answer

Just like how an S corporation shareholder's stock basis cannot be negative, the accumulated adjustments account (AAA) also cannot have a negative balance. The AAA tracks the corporation's taxable income, deductions, and distributions, so a negative balance would mean that the corporation has distributed more than its earnings and profits. Similar to an S corporation shareholder's stock basis, the AAA (Accumulated Adjustments Account) cannot have a negative balance.

Question 7

An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax.

Accepted Answer

This is correct as per the Internal Revenue Service (IRS) guidelines. A shareholder's share of income from a passive activity in an S corporation is considered net investment income for the purposes of the net investment income tax. This tax is a 3.8% Medicare surtax on certain types of investment income, including interest, dividends, and capital gains, that applies to individuals with modified adjusted gross income of over $200,000 ($250,000 for married filing jointly). This is true. Passive income earned by an S corporation shareholder is subject to the net investment income tax.

Question 8

Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

Accepted Answer

S corporation shareholders are only deemed at risk for direct loans they make to their S corporation, not for other types of debt that the corporation may incur.

Question 9

Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

Accepted Answer

Separately stated items include items such as dividends, interest income, capital gains, and losses, which are reported separately on the shareholder's individual tax return and are taxed differently than ordinary business income (loss). Separately stated items are items of income, deduction, loss, or credit that are reported separately on a shareholder's Schedule K-1 and are treated similarly for tax purposes as the shareholder's share of ordinary business income (loss). Examples of separately stated items include capital gains and losses, charitable contributions, and section 179 expenses.

Question 10

When an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

Accepted Answer

According to IRS regulations, when an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution. This gain is then allocated to the shareholders based on their percentage of ownership in the S corporation. This is correct. The S corporation must recognize gain as though it had sold the appreciated property for its fair market value just prior to the distribution. The shareholders also receive a basis in the distributed property equal to its fair market value.

Question 11

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

Accepted Answer

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis. Only shareholder-level debt is included in stock basis calculations.

Question 12

For an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules.

Accepted Answer

The answer of For an S corporation shareholder to deduct...

Question 13

S corporations are not entitled to a dividends received deduction.

Accepted Answer

This is true. S corporations are not eligible for the dividends received deduction because they are not taxed at the entity level. Instead, any income or losses are passed through to shareholders who report the activity on their individual tax returns. Dividends received deduction is only available to C corporations and is not applicable to S corporations.

Question 14

In 2021, for an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules.

Accepted Answer

The statement is true. S corporation losses are subject to several limitations before they can be deducted by shareholders. The three primary limitations are tax-basis, at-risk rules, and passive activity loss rules. This is true. S corporation losses can only be deducted by shareholders if they clear all three tax provision hurdles, which include tax-basis, at-risk amount, and tax shelter rules.

Question 15

Distributions to owners may not cause the AAA to go negative or to become more negative.

Accepted Answer

This statement is true according to the rules of the accumulated earnings and profits system. If a distribution would cause the AAA to go negative or become more negative, then it is deemed to be a taxable dividend. Therefore, companies need to carefully track and manage their AAA to avoid unintended tax consequences. This statement is true. The Accumulated Adjustments Account (AAA) is a measure of a corporation's accumulated earnings that have not been distributed to shareholders. Distributions to owners are made from the retained earnings account, but if those distributions exceed the amount of earnings that have been accumulated in the AAA, the AAA may go negative or become more negative. This can have tax implications for both the corporation and its shareholders. Therefore, it is important to monitor the AAA and ensure that distributions do not cause it to become negative or more negative.

Question 16

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

Accepted Answer

This is known as the "AAA" order of basis adjustments, which stands for "Accumulated Adjustments Account". It is required by the IRS for S corporations to follow this order of basis adjustments. According to the general rules for S corporation shareholder basis adjustments, increasing adjustments are made first, followed by decreasing adjustments. This ensures that the shareholder's basis accurately reflects their investment in the company.

Question 17

As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

Accepted Answer

An S corporation shareholder's basis is dynamic and must be adjusted annually, just like in partnerships.

Question 18

An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

Accepted Answer

According to IRS guidelines, an S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes. This means that the shareholder will be subject to self-employment tax on their share of the income or can use the income to offset self-employment losses. An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes, subject to self-employment tax.

Question 19

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder isgoverned by rules very similar to the rules for partnerships.

Accepted Answer

S corporations with earnings and profits from prior C corporation years are taxed similarly to partnerships in terms of distribution to shareholders. S corporations with earnings and profits from prior C corporation years are subject to similar distribution taxation rules as partnerships.

Question 20

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

Accepted Answer

S corporations must allocate profits and losses to shareholders strictly based on their share of ownership, unlike partnerships or LLCs which can have flexible allocations.

Quiz 11: S Corporations