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Exam 16: S Corporations

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Question 51

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Suppose at the beginning of 2018,Jamaal's basis in his S corporation stock is $1,000,and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation.In 2018,Jamaal's share of S corporation income is $4,000,and he received a $7,000 distribution from the S corporation.How much income does Jamaal report in 2018 from these transactions?

A) $0.
B) $4,000.
C) $6,000.
D) $7,000.
E) None of the choices are correct.

F) B) and E)
G) B) and D)

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Question 52

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

A) True
B) False

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Question 53

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

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

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

During the post-termination transition period,property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

Clampett,Inc.converted to an S corporation on January 1,2018.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 2019,Clampett,Inc.sells its entire inventory for $60,000 (Basis $30,000) .Assuming the corporate tax rate is 21%.Clampett,Inc.'s taxable income in 2019 would have been $1,000,000 if it had been a C corporation.How much built-in gains tax does Clampett,Inc.pay in 2019? 

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

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

S corporations are required to file Form 1120S,U.S.Income Tax Return for an S Corporation,with the IRS by the fifteenth day of the fourth month after the S corporation's year end.

The IRS may consent to an early re-election of S corporation status after a termination under which of the following:

SEC Corporation has been operating as a C corporation since 2015.It elected to become an S corporation,effective January 1,2018.On December 31,2017,SEC reported a net unrealized built in gain of $10,000.In addition to other transactions in 2018,SEC sold inventory it owned at the beginning of 2018 (it did not sell any other assets it owned at the beginning of 2018).At the beginning of the year,the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000.SEC sold the inventory for $28,000.If SEC had been a C corporation in 2018,its taxable income would have been $40,000.How much built-in gains tax must SEC pay in 2018? Assume the corporate tax rate is 21%.

Assume that Clampett,Inc.has $200,000 of sales,$150,000 of cost of goods sold,$60,000 of interest income,and $40,000 of dividends.Assume that Clampett,Inc.never operated as a C corporation and that the corporate tax rate is 21%.What is Clampett,Inc.'s excess net passive income tax?

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

During 2018,CDE Corporation (an S corporation since its inception in 2016)distributed a parcel of land to its sole shareholder Clark.The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000.Before considering the effects of the distribution,Clark's basis in his CDE stock was $10,000.What amount of gain,if any,does CDE recognize on the distribution? What amount of income,if any,does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?

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

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.

XYZ was formed as a calendar-year S corporation with Xavier,Yolinda,and Zach as equal shareholders.On September 15,2018,XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares)to his solely owned C Corporation Zach,Inc.Absent permission from the IRS,what is the earliest date XYZ may again elect to be taxed as an S corporation?

Suppose Clampett,Inc.terminated its S election on August 28,2018.At the end of the S corporation's short tax year ending on August 28,J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis) ,and he had a suspended loss of $20,000.In 2019,J.D.made additional capital contributions of $5,000 on March 15 and $12,000 on September 20.How much loss may J.D.deduct in 2019?

Which of the following is the correct order in which loss limitation rules are applied?