Question 1

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

Accepted Answer

False

Question 2

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

Accepted Answer

This statement is true. The tax rules for S corporations are contained in Subchapter S of the Internal Revenue Code, but where the S corporation rules are silent, the default rules for C corporations apply.

Question 3

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

Accepted Answer

According to IRS regulations, a resident alien must be present in the U.S. for a certain number of days to maintain their residency status. If they move outside the U.S., they will no longer be considered a resident alien and therefore cannot be a shareholder in an S corporation. This will result in the termination of the S election for the corporation.

Question 4

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 5

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, which must be signed by all shareholders of the corporation.

Question 6

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

Accepted Answer

In an S corporation, liabilities can increase the owner's basis, but only if the shareholder is personally liable for the debt or has guaranteed the debt. In a partnership, all partners are considered to be personally liable for the partnership's debts, which means that all liabilities increase the partner's basis.

Question 7

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

Accepted Answer

The answer of NOL carryovers from C years can be...

Question 8

S corporations are treated as partnerships under state property laws.

Accepted Answer

S corporations are separate legal entities from their owners, and are treated as such under state property laws. They are not considered partnerships.

Question 9

A newly formed S corporation does not receive any tax benefit from an NOL incurred in its first tax year.

Accepted Answer

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

Question 10

An S corporation cannot be a shareholder in another corporation.

Accepted Answer

The answer of An S corporation cannot be a shareholder...

Question 11

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 corporate losses through to their personal tax returns, where they can offset other income and decrease their taxable income. This can provide immediate tax benefits. However, shareholders must have sufficient stock basis to take advantage of these benefits.

Question 12

Persons who were S shareholders during any part of the year before the election date, but were not shareholders when the election was made, also must consent to an S election.

Accepted Answer

This is because these individuals' tax attributes (such as built-in gains, passive investment income, and loss carryovers) may affect the S corporation's tax status for years after the election, so their consent is necessary for the election to be valid.

Question 13

For a new corporation, a premature S election may not be effective.

Accepted Answer

If the corporation has not yet met certain requirements, such as having more than one shareholder or issuing stock, the S election may not be effective. It is important to ensure that all requirements are met before making the S election.

Question 14

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, as it is a tax status election specific to corporations.

Question 15

An estate may be a shareholder of an S corporation.

Accepted Answer

An estate may be a shareholder of an S corporation, along with individuals, certain trusts, and estates.

Question 16

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

Accepted Answer

S corporations have restrictions on who can be a shareholder, and typically, entities such as partnerships cannot own shares in an S corporation.

Question 17

Only 51% of the shareholders must consent to an S election.

Accepted Answer

All shareholders must consent to an S election, not just 51%.

Question 18

Most IRAs cannot own stock in an S corporation.

Accepted Answer

According to IRS rules, IRAs cannot own stock in an S corporation, with the exception of certain types of trusts.

Question 19

The termination of an S election occurs on the day after a corporation ceases to be a qualifying S corporation.

Accepted Answer

The termination of an S election generally takes effect on the first day of the taxable year following the year in which the corporation ceases to meet the eligibility criteria, unless the termination is specified to take effect on a certain date or due to a specific event.

Question 20

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...

Quiz 15: S Corporations