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Exam 17: S Corporations

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Question 71

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

A) True
B) False

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Question 72

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C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

A) True
B) False

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Question 73

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Clampett, Inc., converted to an S corporation on January 1, 2019.At that time, Clampett, Inc., had cash ($40,000) , inventory (FMV $60,000, basis $30,000) , accounts receivable (FMV $40,000, basis $40,000) , and equipment (FMV $60,000, basis $80,000) .In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000) .Assume the corporate tax rate is 21 percent and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2020 if it had been a C corporation.In 2021, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation.How much built-in gains tax does Clampett, Inc., pay in 2020? In 2021?

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

XYZ Corporation (an S corporation)is owned by Jane and Rebecca, who are each 50 percent shareholders.At the beginning of the year, Jane's basis in her XYZ stock was $40,000.XYZ reported the following tax information for 2019. $\begin{array}{c}\begin{array}{lll}\quad\quad\quad\quad\text { Description }\\\text {Sales revenue}\\\text {Cost of goods sold}\\\text {Long-term capital gain}\\\text {Dividend income}\\\text {Tax-exempt interest.}\\\text {Salary to owners}\\\text {Employee wages}\\\text {Depreciation expenses}\\\text {Miscellaneous expenses}\\\text {Overall net income}\end{array}\begin{array}{r}\text { Amount } \\\$ 730,000 \\(200,000) \\8,000 \\5,000 \\3,000 \\(120,000) \\(50,000) \\(12,000) \\\underline{(10,000)} \\\underline{ \$ 354,000} \end{array}\end{array}$ Required: a.What amount of ordinary business income is allocated to Jane? b.What is the amount and character of separately stated items allocated to Jane? c.What is Jane's basis in her XYZ Corporation stock at the end of the year?

ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders.On May 1, 2019, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares)to his solely owned C corporation, Conner, Inc.ABC reported business income for 2019 as follows: (Assume that there are 365 days in the year.) $\begin{array}{llcc}\quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \quad \text { Period } & \text { Income } \\ \text { January 1 through April 30 (120 days) } &\$200,000\\ \text { May I through Decermber 31 (245 days) } &\underline{530,000}\\ \text { January 1 through December 31 } &\underline{\$730,000}\\\end{array}$ If ABC uses the daily method of allocating income between the S corporation short tax year (January 1-April 30)and the C corporation short tax year (May 1-December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2019?

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

Jason is one of 100 shareholders in Jace Corporation.The remaining 99 shareholders are unrelated individual U.S.residents.During the year, Jason gave several of his shares in Jace Corp.to his brother as a birthday present and to his best friend, Hal (unrelated to all shareholders in Jace Corp.), as a wedding present.After these gifts, Jace Corp.has 102 shareholders.Is Jace Corp.prohibited from electing to become an S corporation? Explain.

During 2019, MVC operated as a C corporation.However, it made an election to be taxed as an S corporation effective January 1, 2020.MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory.At the end of 2019 its inventory basis under the LIFO method was $63,000.If MVC had used the FIFO method of accounting for its inventory, it would have had a $70,000 basis in its inventory.Finally, MVC's regular taxable income in 2019 was $80,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

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

On March 15, 2019, J.D.sold his Clampett, Inc.(an S corporation) shares to Ellie Mae, Inc.(a C corporation) , terminating Clampett, Inc.'s S election on March 15, 2019.Absent permission from the IRS, what is the earliest date Clampett, Inc., may again elect to be taxed as an S corporation?

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

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original 90 shareholders.Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and two close friends.According to the S corporation shareholder limit rules, how many shareholders does 2hit, Inc., have?

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000.During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items.How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation?