True / False |
1. Liabilities affect the owner’s basis differently in an S corporation than they do in a partnership.
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2. An S corporation cannot incur a tax liability at the corporation level.
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3. Distributions of appreciated property by an S corporation are not taxable to the entity.
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4. A newly formed S corporation does not receive any tax benefit from a C corporation's NOL incurred in its first election tax year.
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5. S corporation status allows shareholders to realize tax benefits from corporate losses immediately (assuming sufficient stock basis).
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6. NOL carryforwards from C years can be used in an S corporation year against ordinary income.
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7. Tax-exempt income at the S corporation level flows through as taxable income to the shareholder.
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8. A one-person LLC can be a shareholder of an S corporation.
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9. A corporation may alternate between S corporation and C corporation status each year depending on which results in more tax savings.
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10. An estate may be a shareholder of an S corporation.
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11. A former spouse is treated as being in the same family as the individual to whom they were married for purposes of determining the number of S corporation shareholders.
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12. A corporation can revoke its S election as of a future date.
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13. Most limited liability partnerships can own stock in an S corporation.
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14. The AAA begins with a zero balance on the first day of an S corporation’s first tax year.
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15. An S corporation's AAA can have a negative balance.
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16. A distribution from the other adjustment account (OAA) is not taxable to an S shareholder.
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17. An S election made before becoming a corporation is valid only beginning with the first 12-month tax year.
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18. At least 51% of the shareholders must consent to an S election.
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19. 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.
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20. The termination of an S election occurs on the day after a corporation ceases to be a qualifying S corporation.
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21. The passive investment income of an S corporation includes gains from the sale of securities.
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22. Tax-exempt income at the corporate level flows through as exempt income to S shareholders.
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23. The Section 179 expense deduction is a Schedule K item on the Form 1120S.
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24. Depreciation recapture income is a Schedule K item on the Form 1120S.
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25. A per-day, per-share allocation of flow-through S corporation items must be used.
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26. Any distribution of cash or other property by a corporation that does not exceed the balance of AAA with respect to S stock during a post-termination transition period of approximately one year, is applied against and reduces the basis of the S stock.
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27. A capital loss allocated to a shareholder always reduces the Other Adjustments Account.
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28. An item such as tax-exempt interest that appears in the Other Adjustments Account affects stock basis, but not AAA.
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29. An S corporation does not recognize a loss when distributing assets that are worth less than their basis.
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30. When loss assets are distributed by an S corporation, a shareholder’s basis is equal to the asset’s fair market value.
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31. An S shareholder’s basis is increased by stock purchases and capital contributions.
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32. An S shareholder’s basis is decreased by distributions treated as being paid from AAA.
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33. An S corporation shareholder’s stock basis includes their direct investments plus a ratable share of any corporate liabilities.
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34. An S shareholder’s stock basis can be reduced below zero.
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35. An S shareholder’s stock basis is reduced by flow-through losses before accounting for distributions.
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36. An S shareholder’s stock basis does not include a ratable share of S corporation liabilities.
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37. An S corporation can claim a deduction for its operating loss amounts.
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38. The corporate-level tax on recognized built-in gains applies when an S corporation disposes of an asset in a taxable disposition within five years after the date on which the S election took effect.
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39. The LIFO recapture tax is a variation of the passive investment income penalty tax.
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40. The passive investment income of an S corporation includes net capital gains from the sale of stocks and securities.
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41. Compensation paid to employees by an S corporation generates a corporate-level FICA tax liability.
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42. The exclusion of gain on disposition of small business stock is not available on disposition of S corporation stock.
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43. There are no advantages for an S corporation to issue § 1244 stock.
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Multiple Choice |
44. An S corporation is subject to the following tax(es).
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45. Which statement is incorrect?
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46. An S corporation must possess which of the following characteristics?
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47. Which entity is eligible to make the S election?
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48. Identify a disadvantage of being an S corporation.
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49. Which of the following, if any, can be eligible shareholders of an S corporation?
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50. Which statement is incorrect with respect to filing an S election?
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51. Which of the following, if any, are eligible shareholders of an S corporation?
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52. Several individuals acquired assets on behalf of Skip Corporation on May 28, purchased assets on June 3 and began business on June 11. They subscribe to shares of stock, file articles of incorporation for Skip, and become shareholders on June 21. The S election must be filed no later than two and one-half months after:
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53. The theoretical maximum number of actual shareholders in an S corporation is:
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54. Which statement is incorrect with respect to the number-of-shareholders test in filing an S election?
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55. A new S corporation shareholder can revoke the S election unilaterally, if they own how much of the existing S corporation’s stock?
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56. Which statement is incorrect with respect to an S shareholder’s consent?
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57. Which item does not appear on Schedule K of Form 1120S?
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58. Which item is not included in an S corporation’s nonseparately computed income?
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59. Which item does not appear on Schedule K of Form 1120S?
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60. What method is used to allocate S corporation income or losses (unless an election to the contrary is made)?
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61. If an S corporation’s beginning balance in OAA is zero and the following transactions occur, what is the entity's ending OAA balance?
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62. Which transaction affects the Other Adjustments Account on an S corporation’s Schedule M-2?
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63. Which of the following items, if any, decreases an S corporation’s AAA?
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64. During the year, Marcus, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. At the end of last year, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It holds a zero balance in accumulated E & P. Which statement is correct?
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65. Amit, Inc., an S corporation, holds an AAA balance of $614,000 at the beginning of the tax year. During the year, the following items occur.
Amit’s ending AAA balance is:
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66. Kinney, Inc., an electing S corporation, holds $5,000 of AEP and $9,000 in AAA at the beginning of the calendar tax year. Kinney has two shareholders, Eric and Maria, each of whom owns 500 shares of Kinney’s stock. Kinney’s taxable income is $6,000 for the year. Kinney distributes $6,000 to each shareholder on February 1, and it distributes another $3,000 to each shareholder on September 1. How is Eric taxed on the distribution?
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67. Fred is the sole shareholder of an S corporation in Fort Deposit, Alabama. At a time when his stock basis is $20,000, the corporation distributes appreciated property worth $100,000 (basis of $20,000). Fred’s taxable gain is:
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68. You are given the following facts about a solely owned S corporation. What is the shareholder’s ending stock basis?
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69. Which of the following reduces a shareholder’s S corporation stock basis?
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70. You are given the following facts about a 50% owner of an S corporation. Compute her ending stock basis.
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71. Samantha owned 1,000 shares in Evita, Inc., an S corporation, that uses the calendar year. On October 11, Samantha sells all of her Evita stock. Her stock basis at the beginning of the tax year was $60,000. Evita's ordinary income for the year was $22,000 through the date of sale, and Samantha receives a distribution of $35,000 on May 3rd. Her stock basis at the time of the sale is:
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72. You are given the following facts about a 40% owner of an S corporation. Calculate her ending stock basis.
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73. Oxen Corporation incurs the following transactions.
Oxen maintains a valid S election and does not distribute any assets (cash or property) to its sole shareholder, Megan. As a result, Megan must recognize (ignore 20% QBI deduction):
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74. On January 1, Bobby and Alice equally own all of the stock of an electing S corporation called Prairie Dirt Delight. The entity incurs a $60,000 loss for the year. On the 200th day of the year (not a leap year), Bobby sells his one-half of the stock to his son, Saul. How much of the $60,000 loss, if any, is allocated to Bobby?
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75. A cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to S status on February 10. By the end of the year, $60,000 of these receivables have been collected. Calculate any built-in gains tax, assuming that there is sufficient taxable income.
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76. Mock Corporation converts to S corporation status in 2024. Mock used the LIFO inventory method in 2023 and had a LIFO inventory of $435,000 (FIFO value of $550,000) on the date of the S election. How much tax must be added to Mock’s 2023 corporate tax liability?
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77. A calendar year C corporation reports a $41,000 NOL in 2023, but it elects S status for 2024 and generates an NOL of $30,000 in that year. At all times during 2024, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10% of the stock. Kris, one of the 10 shareholders, holds an S stock basis of $2,300 at the beginning of 2024. How much of the 2024 loss, if any, can she deduct?
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78. Pepper, Inc., an S corporation, holds a $1 million balance in accumulated E&P. It reports sales revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the interest income of $140,000. What is Pepper’s passive income penalty tax payable, if any?
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79. If the beginning balance in OAA is zero and the following transactions occur, what is the ending OAA balance? Depreciation recapture income $21,000 Payroll tax penalty 4,200 Tax-exempt interest 5,700 Nontaxable life insurance proceeds 3,900 Insurance premiums paid (nondeductible) 2,900 Charitable contributions 17,000
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80. At the beginning of the year, the AAA of Rose, Inc. shows a balance of $682,000. During the year, the following items occur. Compute the end-of-year AAA balance. Operating income $452,000 Interest income 6,550 Dividend income 14,050 Municipal bond interest income 12,000 Short-term capital loss from sale of building 7,400 Section 179 expense 6,500 Charitable contributions 19,000 Cash distributions 57,000 Depreciation recapture 3,500
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81. This year, Jiang, the sole shareholder of a calendar year S corporation, received a distribution of $17,000. On December 31 of the prior year, his stock basis was $3,000. The corporation earned $12,000 ordinary income during the year. It has a zero balance in accumulated E&P. Which statement is correct? Ignore the 20% QBI deduction.
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82. Which of the following items, if any, has no effect on the stock basis of an S corporation shareholder?
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83. Lemon Corporation incurs the following transactions. Net income from operations $110,000 Interest income from saving account 5,000 Long-term capital gain from sale of securities 9,000 Short-term capital loss from sale of securities 4,000 Lemon maintains a valid S election and does not distribute any dividends to its shareholder, Nina. As a result, which of the following must Nina recognize? Ignore the 20% QBI deduction.
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84. Lent Corporation converts to S corporation status in 2023. Lent had been using the LIFO inventory method and held a LIFO inventory value of $510,000 (FIFO value of $650,000). How much tax , if any, is added for these items for the final C corporation year?
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Completion |
85. As with partnerships, the income, deductions, and tax credits of an S corporation ____________________ to the shareholders annually.
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86. Some ____________________and taxation rules apply to an S corporation.
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87. The choice of a flow-through entity for a closely held corporation often is between a(n) ____________________ (a Federal tax entity) and a(n) ____________________ (a state tax entity).
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88. If any entity electing S status is currently a C corporation, NOL carryovers from prior years generally____________________ (can/cannot) be used in an S corporation year.
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89. An S corporation is limited to a theoretical maximum of ____________________ shareholders.
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90. Shareholders owning a(n) ____________________ of shares (voting and nonvoting) may ____________________ revoke an S election.
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91. If an S corporation has C corporation E & P and passive investment income in excess of ____________________ % of its gross receipts for ____________________ consecutive taxable years, the S election is terminated at the beginning of the ____________________ year.
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92. Depreciation recapture income is a ____________________ (separately, nonseparately) computed amount.
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93. An S corporation’s separately stated items generally are identical to those reported by _________________________.
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94. Separately stated items are listed on Schedule _________________________ of the Form 1120S.
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95. In the case of a complete termination of an S corporation interest, a ____________________ tax year may occur.
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96. Since loss property receives a ____________________ in basis without any loss recognition, S corporation distributions of loss property generally should be ____________________.
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97. Nonseparately computed loss ____________________ (increases, reduces) an S shareholder’s stock basis.
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98. An S corporation recognizes a ____________________ on any distribution of appreciated property.
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99. Stock basis first is increased by income items, then ____________________ by distributions, and finally decreased by ____________________.
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100. An S corporation’s LIFO recapture amount equals the excess of the inventory’s value under ____________________ over the ____________________ value.
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101. The exclusion of _________________ on the disposition of small business stock (is/is not) _________________ available for S stock.
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Subjective Short Answer |
102. Estella, Inc., a calendar year S corporation, incurred the following items during the tax year.
Calculate Estella’s nonseparately computed income.
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103. Towne, Inc., a calendar year S corporation, holds AAA of $627,050 at the beginning of the tax year. During the year, the following items occur.
Calculate Towne’s ending AAA balance.
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104. Ridden, Inc., a calendar year S corporation, incurred the following items.
Calculate Ridden’s nonseparately computed income.
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105. Gene Grams is a 45% owner of a calendar year S corporation during the tax year. His beginning stock basis is $230,000, and the S corporation reports the following items.
Calculate Grams’s stock basis at year-end.
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106. You are a 60% owner of an S corporation. Calculate your ending stock basis based upon these facts.
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107. On December 31, Erica Sumners owns one share of an S corporation’s 10 outstanding shares of stock. The basis of Erica’s share is $300. The next year, the S corporation incurs a loss of $3,650. Determine the amount of the loss allocated to Erica, and calculate her stock basis at the end of the second year
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108. Alomar, a cash basis S corporation in Orlando, FL, holds the following assets and liabilities on January 1, 2023, the date the S election is made.
During the year, Alomar collects the accounts receivable and pays the accounts payable. The land is sold for $3 million, and the taxable income for the year is $590,000. Calculate any built-in gains tax.
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109. Pepper, Inc., an S corporation in Norfolk, VA, has revenues of $400,000, taxable interest of $380,000, operating expenses of $250,000, and deductions attributable to the interest income of $140,000. Calculate any passive investment income penalty tax payable by this corporation.
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Essay |
110. Discuss two ways that an S election may be terminated.
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111. Advise your client how income, expenses, gain, and losses are allocated to shareholders of an S corporation.
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112. Explain the OAA concept.
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