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Chapter 23: S-Corps (Study Tools)

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An S corporation must make estimated tax payments with respect to any tax on ordinary income. True False

False

A consent extension is available if Form 1120 is filed on a timely basis. True False

False A consent extension is available only if Form 2553 is filed on a timely basis, reasonable cause is given, and the interests of the government are not jeopardized.

A consent extension is available if Form 1120 is filed on a timely basis. True False

False A consent extension is available only if Form 2553 is filed on a timely basis, reasonable cause is given, and the interests of the government are not jeopardized.

A distribution in excess of stock basis reduces any debt basis. True False

False A distribution in excess of stock basis does not reduce any debt basis. If a loss and a distribution occur in the same year, the loss reduces the stock basis after the distribution.

A new S corporation's 2½-month election period will begin when it has at least five shareholders. True False

False A new corporation's 2½-month election period begins at the earliest occurrence of (1) when the corporation has shareholders, (2) when it acquires assets, or (3) when it begins doing business.

For Federal income tax purposes, taxation of S corporations is identical to that of partnerships. True False

False Although the Federal tax treatment of S corporations and partnerships is similar, the two sets of computations are not identical. S corporations also must apply certain tax rules of Subchapters C and K.

A new corporation that does not yet exist cannot make an early S election. True False

True A corporation that does not yet exist cannot make an S corporation election. Thus, for new corporations, a premature election may not be effective.

A group of family members may be treated as one shareholder for purposes of determining the number of shareholders in an S corporation. True False

True A group of family members is treated as one shareholder in determining the number of shareholders. For this purpose, a family includes any common ancestor, the lineal descendants of the common ancestor, and the spouses (or former spouses) of the lineal descendants or common ancestor.

The short-year election provides an opportunity for the S corporation to shift income, losses, and credits among shareholders. True False

True The short-year election provides an opportunity to shift income, losses, and credits among shareholders. This election is desirable in circumstances where more loss can be allocated to taxpayers with higher marginal rates.

The LIFO recapture tax is payable in four equal installments. True False

True The LIFO recapture tax is payable in four equal installments, with the first payment due on or before the due date for the corporate return for the last C corporation year (without regard to any extensions). The remaining three installments are paid on or before the due dates of the succeeding corporate returns.

Distributions of loss property by an S corporation receive a step-down in basis without any loss recognition. True False

True The S corporation does not recognize a loss when distributing assets that are worth less than their basis. The potential loss is postponed until the shareholder sells the stock of the S corporation.

The gain that is subject to the built-in-gains tax is limited to the aggregate net built-in gain of the corporation at the time it converted to S status. True False

True The gain that is subject to the tax is limited to the aggregate net built-in gain of the corporation at the time it converted to S status. Recognized built-in losses and built-in gains are netted each year to determine the built-in gains tax base.

Passive activity losses flow through the S corporation, to be included in the shareholders' passive activity loss limit calculations. True False

True The shareholders can apply such losses or credits only against income from other passive activities.

Shareholders may deduct losses in excess of the basis in S corporation stock if the shareholder has made no loans to the corporation. True False

False A shareholder's basis in S stock never can be reduced below zero. Once stock basis reaches zero, any additional basis reductions from losses or deductions, but not distributions, decrease (but not below zero) the shareholder's basis in loans made to the S corporation. Any excess of losses or deductions over both bases is suspended until there are subsequent bases.

For Federal income tax purposes, taxation of S corporations is identical to that of partnerships. True False

Any loss carryover due to insufficient basis remaining at the end of an approximately one-year post-termination transition period can be carried forward five years. True False

False Any loss carryover due to insufficient basis remaining at the end of an approximately one-year post-termination transition period is lost forever.

Unexercised stock options generally constitute a second class of stock. True False

False Authorized and unissued stock or treasury stock of another class do not count as a second class of stock. Likewise, unexercised stock options, warrants, and convertible debt usually do not constitute a second class of stock.

Corporate borrowings of an S corporation increase the shareholder's basis. True False

False Except for loans from the shareholder to the corporation, corporate borrowing has no effect on S corporation shareholder basis.

If a shareholder's percentage of ownership in an S corporation changes during the year, the shareholder is assigned a pro rata share of each item on a monthly basis. True False

False If a shareholder's stock holding changes during the year, the shareholder is allocated a pro rata share of each item for each day the stock is owned.

In recent tax years, most business returns were filed by partnerships. True False

False In 2019, sole proprietorships filed 27.8 million returns, partnerships filed 3.8 million returns, and corporations filed 6.5 million returns.

Both C corporations and S corporations can carry net operating losses back two years. True False

False In an S corporation, the shareholders may use their proportionate shares of the NOL to offset other taxable income in the current year, providing an immediate tax savings. In contrast, a C corporation is required to carry the NOL forward.

Maximum dollar sales restrictions apply to S corporations. True False

False No maximum or minimum dollar sales or capitalization restrictions apply to small business corporations.

A distribution of cash or other property by an S corporation to shareholders that does not exceed the balance of AAA during a one-year period following an S election termination receives special tax-free treatment. True False

False Normally, distributions to shareholders from a C corporation are taxed as dividends to the extent of E & P. However, any distribution of cash by a corporation to shareholders during a one-year period following S election termination receives a different treatment. Such a distribution is treated as a tax-free recovery of stock basis to the extent that it does not exceed the AAA. Only cash distributions receive this treatment.

Luis sells S corporation stock to Dante on September 1, 2023. Dante is considered to own the stock on the date of the transfer: September 1, 2023. True False

False On the date of the transfer, the transferor, Luis (and not the transferee, Dante), is considered to own the stock.

Luis sells S corporation stock to Dante on September 1, 2023. Dante is considered to own the stock on the date of the transfer: September 1, 2023. True False

False On the date of the transfer, the transferor, Luis (and not the transferee, Dante), is considered to own the stock.

An S corporation's net operating losses can be carried back two years by the S corporation. True False

False One major advantage of an S election is the ability to pass through any net operating loss of the corporation directly to its shareholders.

Pass-through income accrues Social Security benefits for its recipient. True False

False The choice between a salary and pass-through income is not clear-cut. Although a salary is subject to payroll tax and pass-through income is not, pass-through income does not accrue Social Security benefits for its recipient.

If a revocation splits the corporation's tax year into a short S corporation year and a short C corporation year, the corporation must allocate income or loss for the entire year on a pro rata basis. True False

False The corporation can allocate income or loss for the entire year on a pro rata basis, using the number of days in each short year. However, rather than allocating on a pro rata basis, the corporation can elect to compute actual income or loss attributable to the two short years.

The passive investment income (PII) tax rate is a flat 30%. True False

False The tax rate is the highest corporate rate for the year (21%). The rate is applied to the excess net passive income.

If the LIFO value is higher than the FIFO value when a corporation elects S status, a tax refund will result. True False

False The taxable LIFO recapture amount equals the excess of the inventory's value under FIFO over the LIFO value. No tax refund is allowed if the LIFO value is higher than the FIFO value.

For an S corporation shareholder, basis is increased for the ratable share of any corporate liabilities. True False

False Unlike partnerships, an S corporation shareholder's basis includes only the shareholder's direct investments, not his or the shareholder's ratable share of any corporate liabilities.

For an S corporation shareholder, basis is increased for the ratable share of any corporate liabilities. True False

False Unlike partnerships, an S corporation shareholder's basis includes only the shareholder's direct investments, not his or the shareholder's ratable share of any corporate liabilities.

Unless an effective date is specified, revocation made after the first 2½ months of the current tax year is effective for the following tax year. True False

True A revocation filed up to and including the fifteenth day of the third month of the tax year is effective for the entire tax year, unless a later date is specified. Similarly, unless an effective date is specified, revocation made after the first 2½ months of the current tax year is effective for the following tax year.

Unless an effective date is specified, revocation made after the first 2½ months of the current tax year is effective for the following tax year. True False

Two classes of common stock that are identical, except that one class is voting and the other is nonvoting, are treated as a single class of stock for S corporation purposes. True False

True An S corporation may have only one class of stock issued and outstanding. This restriction permits differences in voting rights, but not differences in distribution or liquidation rights. Thus, two classes of common stock that are identical, except that one class is voting and the other is nonvoting, are treated as a single class of stock for S corporation purposes.

Gain on the distribution of appreciated property to a shareholder is recognized by the S corporation and passed through to the shareholder. True False

True An S corporation recognizes a gain on any distribution of appreciated property in the same manner as if the asset were sold to the shareholder at its fair market value. Gain on the distribution of appreciated property to a shareholder is recognized by the S corporation and passed through to the shareholder.

An S shareholder's basis is decreased by nondeductible expenses. True False

True An S shareholder's basis is decreased by nondeductible expenses. It is also decreased by nonseparately computed loss and by separately stated loss and deduction items.

Where the S corporation rules are silent, C corporation rules apply to the S corporation. True False

True As a general rule, where the S corporation provisions are silent, C corporation rules apply.

The S corporation is a flow-through entity. True False

True As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions of wealth (like cash) are made to the shareholders.

If a shareholder's stock holding changes during the year, the transferor is considered to own the stock on the date of the transfer. True False

True If a shareholder's stock holding changes during the year, the allocation of income and loss assigns the shareholder a pro rata share of each item for each day the stock is owned. On the date of transfer, the transferor (and not the transferee) is considered to own the stock.

The termination of an S election occurs on the day of the event causing termination of the election. True False

True If an S corporation fails to qualify as a small business corporation at any time after the election has become effective, its status as an S corporation ends. The termination occurs on the day that an S requirement is violated.

Shareholders can apply passive activity losses only against income from other passive activities. True False

True If the corporate activity involves rentals or the shareholders do not materially participate, any loss or credit that flows through is passive. The shareholders can apply such losses or credits only against income from other passive activities.

Shareholders can apply passive activity losses only against income from other passive activities. True False

Tax-exempt income is separately stated on Schedule K of Form 1120S. True False

True Items separately stated on Schedule K of Form 1120S include: -tax-exempt income -long- and short-term capital gains and losses -§ 1231 gains and losses charitable contributions -passive activity gains, losses, and credits -data used to compute the qualified business income deduction; and § 179 depreciation.

S corporations that have total assets on Schedule L at the end of the tax year that equal or exceed $10 million must file Schedule M-3 in lieu of Schedule M-1. True False

True Only a few large S corporations must file a Schedule M-3. The schedule provides detailed information about the entity's book-tax differences, and it can be used by the IRS to target specific items that will be subjected to an audit.

Other than for income tax purposes, S corporations are recognized as separate legal entities. True False

True Other than for income tax purposes, S corporations are recognized as separate legal entities and generally provide shareholders with the same liability protection available to C corporations.

Passive investment income includes gains and losses from the sale of capital assets. True False

True Passive investment income includes dividends, interest, rents, gains and losses from sales of capital assets, and royalties net of investment deductions.

It may be beneficial for an S corporation to issue § 1244 stock. True False

True S corporation may issue § 1244 stock to its shareholders to obtain ordinary loss treatment.

Tax-exempt income is a separately stated income for an S corporation. True False

True Tax-exempt income is separately stated on Schedule K of Form 1120S, along with other items such as long- and short-term capital gains and losses, § 1231 gains and losses, and charitable contributions.

The IRS can require that reasonable compensation be paid to family members who render services or provide capital to the S corporation. True False

True The IRS can require that reasonable compensation be paid to family members who render services or provide capital to the S corporation. The IRS also can adjust the items taken into account by family-member shareholders to reflect the value of services or capital they provided.

March 15 of the current year is the deadline for which an entity must file a valid election with the IRS to become an S corporation. True False

True To become an S corporation, the entity must file a valid election with the IRS. For the election to be valid, it should be filed on a timely basis and all shareholders must consent. For S corporation status to apply in the current tax year, the election must be filed either in the previous year or on or before the fifteenth day of the third month (i.e., March 15) of the current year.

Shareholders of certain S corporations may deduct up to 20% of certain qualified business income (QBI). True False

True To bring the taxation of flow-through entities such as S corporations closer to the C corporation 21% rate, shareholders of certain S corporations (and other qualified flow-through entities) may deduct up to 20% of certain qualified business income (QBI).

The method of accounting used by an S corporation is chosen at the corporate level. True False

True With a few exceptions, S corporations generally make tax accounting and other elections at the corporate level. A few elections can be made at the shareholder level, such as the choice between a foreign tax deduction or credit. But shareholders cannot make these accounting method elections; only the entity can do so.

Distributions of loss property by an S corporation receive a step-down in basis without any loss recognition. True False

The gain that is subject to the built-in-gains tax is limited to the aggregate net built-in gain of the corporation at the time it converted to S status. True False

Heart, Inc., an S corporation, records the following items: AAA, beginning of year $15,000 Ordinary income 40,000 Tax-exempt interest 3,000 Payroll penalty expense 4,000 Charitable contributions 7,000 Distributions to shareholders 20,000 Heart's AAA balance at the end of the year is: a. $24,000. b. $44,000. c. $48,000. d. $27,000. e. $35,000.

a. $24,000. Heart's AAA at the end of the year is computed as follows: AAA, beginning of year $ 15,000 Plus: ordinary income 40,000 Less: payroll penalty expense (4,000) Less: charitable contributions (7,000) Less: distributions to shareholders (20,000) AAA, end of year $24,000 Tax-exempt interest is not used to compute AAA.

During the current year, Orion Corporation incurs the following transactions: Net income from operations $100,000 Interest income from savings account 3,000 Long-term capital gain from sale of securities 10,000 Short-term capital loss from sale of securities 4,000 Orion maintains a valid S election and does not distribute any assets (cash or property) to its sole shareholder, Candice. As a result, Candice must recognize: a. Ordinary income of $103,000, long-term capital gain of $10,000, and a $4,000 short-term capital loss. b. Ordinary income of $109,000. c. Ordinary income of 109,000 and a long-term capital gain of $6,000. d. Ordinary income of $103,000 and long-term capital gain of $6,000. e. Ordinary income of $100,000 and a short-term capital loss of $4,000.

a. Ordinary income of $103,000, long-term capital gain of $10,000, and a $4,000 short-term capital loss. Net income and interest income are both ordinary income, so $103,000 of ordinary income must be recognized ($100,000 + $3,000). Capital gains and losses are separately stated items.

How are capital gains taxed in a partnership or LLC? a. They are treated as a conduit. Owners must account for their respective shares. b. They are taxed at the owner level with opportunity to use alternative tax rate. c. They are treated as a conduit, with certain exceptions (a possible penalty tax). Shareholders must account for their respective shares. d. They are taxed at the owner level, with a minimum 21% rate. e. They are taxed at the corporate level, with a maximum 21% rate.

a. They are treated as a conduit. Owners must account for their respective shares.

The following facts relate to Cheese Corp., a one-shareholder S corporation. What is the shareholder's ending stock basis? Beginning stock basis $60,000 Ordinary income 50,000 Fine for late payment of sales tax 3,000 Stock purchases 10,000 Tax-exempt interest income 8,000 a. $109,000 b. $125,000 c. $110,000 d. $70,000 e. $131,000

b. $125,000 The shareholder's ending stock basis is $125,000 ($60,000 + $50,000 - $3,000 + $10,000 + $8,000).

The following facts relate to a one-shareholder S corporation. What is the shareholder's ending stock basis? Ordinary income $100,000 Payroll tax penalty 2,140 Stock purchases 32,000 Tax-exempt insurance proceeds 50,000 Insurance premiums paid (nondeductible) 2,700 Beginning stock basis 36,800 a. $163,960 b. $213,960 c. $216,100 d. $181,960 e. $218,240

b. $213,960 The shareholder's ending stock basis is $213,960 ($36,800 + $100,000 + $32,000 - $2,140 + $50,000 - $2,700).

Yuri, a shareholder, owned 40% of Tempest's stock for 210 days and 30% of Tempest's stock for the remaining 155 days of the year (not a leap year). Using the required per-day allocation method, Yuri's share of the S corporation's ordinary income of $80,000 (rounded to the nearest dollar) is: a. $10,192. b. $28,603. c. $32,000. d. $18,411. e. $40,000.

b. $28,603. Using the per-day allocation method: $80,000 × 40% × 210/365 = $18,411 $80,000 × 30% × 155/365 = 10,192 Total $28,603

Yuri, a shareholder, owned 10% of Tempest's stock for 100 days and 40% of Tempest's stock for the remaining 265 days of the year (not a leap year). Using the required per-day allocation method, Yuri's share of the S corporation's ordinary income of $10,000 (rounded to the nearest dollar) is: a. $10,000. b. $3,178. c. $4,000. d. $2,740. e. $2,904.

b. $3,178. Using the per-day allocation method: $10,000 × 10% × 100/365 = $ 274 $10,000 × 40% × 265/365 = 2,904 Total $3,178

Leroy owns 800 shares in Jupiter, Inc., an S corporation. In 2023, Leroy's basis in his stock is $30,000, before the adjustment for this year's losses. During 2023, Leroy's share of the corporation's ordinary loss is $20,000, and Leroy's share of its capital loss is $15,000. How much can Leroy deduct due to these losses? a. $15,000 b. $30,000 c. $20,000 d. $0 e. $45,000

b. $30,000 The loss is limited to his basis in the stock. Total loss is $35,000 ($20,000 + $15,000). However, the stock basis is $30,000, so the loss is limited to $30,000.

Turkey Corp., a C corporation, owns a single asset with a basis of $70,000 and a fair market value of $100,000 when it elects S corporation status. Three months later, it sells the asset for $100,000. What is the built-in gains tax, assuming that there is sufficient taxable income? a. $0 b. $6,300 c. $14,700 d. $4,500 e. $21,000

b. $6,300 The built-in gain is $30,000 ($100,000 - $70,000). The built-in gains tax is calculated as $6,300 ($30,000 × 21%).

Indigo, Inc., a calendar year S corporation, has no AEP. During the year, Amir, an individual shareholder of the corporation, receives a cash distribution of $18,500 from Indigo. Amir's basis in the stock is $15,000. In this case: a. Amir has a negative stock basis of $3,500. b. Amir receives $15,000 tax-free. c. Amir receives $3,500 tax-free. d. Amir has a capital gain of $18,500. e. Amir has ordinary income of $15,000.

b. Amir receives $15,000 tax-free. Amir has a capital gain of $3,500, the excess of the distribution over the stock basis ($18,500 - $15,000). The remaining $15,000 is tax-free, but it reduces Amir's basis in his stock to zero.

Which of the following statements regarding the amount of salary paid to a shareholder-employee of an S corporation and the tax consequences is true? a. Smaller amounts may be advantageous if the maximum contribution allowed for the shareholder-employee under the corporation's retirement plan has not been reached. b. Larger amounts might be advantageous if the maximum contribution allowed for the shareholder-employee under the corporation's retirement plan has not been reached. c. Smaller amounts may be beneficial if the parties are trying to increase losses that pass through because of the basis limitation. d. Larger amounts may be beneficial if the parties are trying to shift taxable income to lower-bracket shareholders. e. Larger amounts may be beneficial if the parties are trying to shift taxable income to curtail a reduction of Social Security benefits.

b. Larger amounts might be advantageous if the maximum contribution allowed for the shareholder-employee under the corporation's retirement plan has not been reached. The salary paid to a shareholder-employee of an S corporation can have varying tax consequences and should be considered carefully. Larger amounts might be advantageous if the maximum contribution allowed for the shareholder-employee under the corporation's retirement plan has not been reached. Smaller amounts may be beneficial if the parties are trying to shift taxable income to lower-bracket shareholders, reduce payroll taxes, curtail a reduction of Social Security benefits, or restrict losses that do not pass through because of the stock basis limitation.

Which of the following statements regarding S corporations is true? a. C corporation provisions do not apply to S corporations. b. S corporations resemble partnerships under the Federal income tax law. c. An S corporation may allocate income and deduction items to specific shareholders, like a partnership does. d. The S corporation rules are contained in Subchapter B of the Internal Revenue Code. e. S corporations are organized under Federal law.

b. S corporations resemble partnerships under the Federal income tax law. S corporations are organized under state law. The S corporation rules are contained in Subchapter S of the Internal Revenue Code. An S corporation may not allocate income and deduction items to specific shareholders, like a partnership does. And, a variety of C corporation provisions apply to S corporations. So, the only statement that is correct is that S corporations resemble partnerships under the Federal income tax law.

Which of the following statements regarding S corporations is true? a. If an S corporation shareholder reduces their stock ownership by 10%, the S corporation can elect to have an interim closing of the books. b. The pro rata allocation method assigns an equal amount of each of the S items to each day of the year. c. In a short tax year, the first year ends on the last day of the month in which the termination occurred. d. S corporations are free to allocate income to the shareholders in any manner they deem appropriate. e. All nonseparately stated income or loss is allocated on a monthly basis.

b. The pro rata allocation method assigns an equal amount of each of the S items to each day of the year. Each shareholder is allocated a pro rata portion of nonseparately stated income or loss and all separately stated items. The pro rata allocation method assigns an equal amount of each of the S items to each day of the year. If a shareholder's interest is completely terminated by a sale or by a disposition following death during the tax year, all shareholders owning stock during the year and the corporation may elect to treat the S taxable year as two taxable years. Under this election, an interim closing of the books is undertaken.

The built-in gains tax: a.) Applies only to C corporations. b.) Is a corporate-level tax. c.) Applies to asset sales within 10 calendar years after the date on which the S election took effect. d.) Is a flat rate of 35%. e.) Only applies to the sale of real estate.

b.) Is a corporate-level tax. The built-in gains tax is a corporate-level tax on any built-in gain recognized when the S corporation disposes of an asset in a taxable disposition within five calendar years after the date on which the S election took effect.

ABC, a C corporation, owns a single asset with a basis of $150,000 and a fair market value of $710,000, when it elects S corporation status. Two months later, it sells the asset for $710,000. What is the built-in gains tax, assuming that there is sufficient taxable income? a. $0 b. $149,100 c. $117,600 d. $21,000 e. $31,500

c. $117,600 The built-in gain is $560,000 ($710,000 - $150,000). The tax is $117,600 ($560,000 × 21%).

Ivan and Jaretta are married and live in a community property state. Danielle and Melanie are married and live in a state that is not a community property state. Jaretta and Danielle incorporate in January and file Form 2553 to become an S corporation. Ivan and Melanie have nothing to do with the operation of the corporation. Which of the following statements regarding shareholder consent to become an S corporation is true?

c. Because Ivan and Jaretta live in a community property state, Ivan's consent is required. Both spouses must consent if they own their stock jointly, even though they count as one shareholder. This requirement has led to considerable taxpayer grief—particularly in community property states. Because Jaretta is married and lives in a community property state, her spouse also must consent to the S election. Danielle does not live in a community property state, so her spouse need not consent.

A revocation of the S corporation election: a. Cannot be made prospectively. b. Requires the consent of 90% of the shareholders owning stock on the day the revocation is made. c. Can split the corporation's tax year into a short S corporation year and a short C corporation year. d. Can be made by a new shareholder owning more than 30% of the stock. e. Occurs 30 days after the first day of the C corporation year.

c. Can split the corporation's tax year into a short S corporation year and a short C corporation year. A corporation can revoke its S status prospectively by specifying a future date when the revocation is to be effective. A revocation that designates a future effective date splits the corporation's tax year into a short S corporation year and a short C corporation year. The day on which the revocation occurs is treated as the first day of the C corporation year. The corporation allocates income or loss for the entire year on a pro rata basis, using the number of days in each short year. A voluntary revocation of the S election requires the consent of shareholders owning a majority of shares on the day the revocation is to be made.

After an S election has been terminated, how long must the corporation wait before reelecting S corporation status? Assume no circumstances that warrant a waiting period waiver apply. a. Zero years—reelection can be made immediately b. Three years c. Five years d. One year e. Never—once election has been terminated, cannot be reinstated, barring waivers

c. Five years After an S election has been terminated, the corporation must wait five years before reelecting S corporation status. The five-year waiting period is waived if: (1) there is a more-than-50% change in ownership of the corporation after the first year for which the termination is applicable, or (2) the event causing the termination was not reasonably within the control of the S corporation or its majority shareholders.

Gold Company has $100,000 of income before payment of $100,000 of reasonable salaries to its owners/employees (who are in the 24% bracket). Which of the following statements is true? a. If Gold is a C corporation, it will pay tax of $21,000. b. S corporations must report the salaries as a separately stated item. c. Gold will pay no tax if it is organized as a partnership, C corporation, or S corporation. d. The S corporation will have to pay an accumulated earnings tax. e. If Gold is a C corporation, it is eligible for the qualified business income deduction.

c. Gold will pay no tax if it is organized as a partnership, C corporation, or S corporation. A C-corporation has taxable income of zero since the salary payments are deductible. The partnership and S corporation pay no tax; the income flows through to the owners. Therefore, no tax would be paid by the partnership, C corporation, or S corporation.

Parcel, Inc., an S corporation for 15 years, distributes a tract of land held as an investment to Sheryl, its majority shareholder. The land was purchased for $90,000 five years ago and currently is worth $60,000. As a result of this distribution: a. The $30,000 loss is recognized by Sheryl. b. Sheryl takes a basis of $90,000 in the land. c. Parcel recognizes $15,000 of the loss and Sheryl recognizes $15,000 of the loss. d. The $30,000 loss is recognized at the corporate level. e. Sheryl takes a basis of $30,000 in the land.

c. Parcel recognizes $15,000 of the loss and Sheryl recognizes $15,000 of the loss. The loss of $30,000 ($90,000 purchase price - $60,000 market value) is not recognized at the corporate level or at the shareholder level. The shareholder's basis in the property is $60,000, its fair market value.

Which of the following correctly expresses the full range during which an entity must file a valid election with the IRS to become an S corporation in a given year? a. April 15 of current year or in the previous year b. Previous year-April 15 of current year c. Previous year-March 15 of current year d. March 15 of current year or in the previous year e. January 1-January 31 of the current year

c. Previous year-March 15 of current year For S corporation status to apply in the current tax year, the election must be filed either in the previous year or on or before the fifteenth day of the third month of the current year.

Which of the following correctly expresses the full range during which an entity must file a valid election with the IRS to become an S corporation in a given year? a. Previous year-April 15 of current year b. March 15 of current year or in the previous year c. Previous year-March 15 of current year d. January 1-January 31 of the current year e. April 15 of current year or in the previous year

Russell and Megan are going to establish a business entity. They expect the business to be very successful in the long run, but project losses of approximately $100,000 for each of the first five years. Due to potential environmental concerns, limited liability is a requisite for the owners. Which of the following forms of business entity should they select? a. Limited partnership b. It does not matter which form of business Russell and Megan select. c. S corporation d. General partnership e. C corporation

c. S corporation The S corporation will permit the losses of $100,000 to be passed through to the shareholders and will satisfy the limited liability requirement. The general or limited partnership will permit the losses to be passed through to the partners, but will not satisfy the limited liability requirement (i.e., unlimited liability for all partners in a general partnership and unlimited liability for the general partners in a limited partnership). The C corporation will satisfy the limited liability requirement but will not permit the losses to be passed through to the shareholders.

Candle, Inc., a calendar year S corporation, is partly owned by Shamus, who has a beginning stock basis of $23,000. During the year, Shamus's share of a long-term capital gain is $4,000, and the share of an ordinary loss is $19,000. Shamus receives a $12,000 distribution. Shamus's deductible loss is: a. $0. b. $19,000. c. $4,000. d. $15,000. e. $23,000.

d. $15,000. $23,000 (beginning basis) + $4,000 (long-term capital gain) - $12,000 (distribution) = $15,000 (basis for loss limitation purposes). Shamus's deductible loss is $15,000 (can't exceed basis). Suspended loss is $4,000 ($19,000 - $15,000). Distributions made by an S corporation are taken into account before applying the loss limitation for the year.

Sweet Tea, an S corporation, reported the following items: Sales revenue $850,000 Long-term capital gain 18,000 Cost of goods sold 240,000 Wages paid to employees 150,000 Tax-exempt income 38,000 Other operating expenses 40,000 How much will Sweet Tea report as nonseparately stated income? a. $402,000 b. $458,000 c. $460,000 d. $420,000 e. $476,000

d. $420,000 Sweet Tea's nonseparately stated income is $420,000 ($850,000 sales revenue - $240,000 cost of goods sold - $150,000 wages paid to employees - $40,000 other operating expenses). The long-term capital gain and the tax-exempt income are separately stated items.

Which of the following is an eligible shareholder of an S corporation? a. A partnership b. A nonresident alien c. A citizen of Russia who lives in Scotland d. A child who is a U.S. citizen e. A C corporation

d. A child who is a U.S. citizen Eligible shareholders include U.S. citizens or residents, estates, certain trusts, charities, and certain other tax-exempt organizations. Partnerships, corporations, limited liability partnerships, and most LLCs are prohibited from owning S corporation stock.

On January 2, 2023, Cherie loans her S corporation $10,000. By the end of 2023, Cherie's stock basis is zero, and the basis in her note has been reduced to $8,000. The company also makes distributions to Cherie of $8,000. Which of the following statements is true? a. There is a $2,000 LTCG. b. There is an $8,000 LTCG. c. The loan basis is now $8,000. d. The loan basis is now $10,000. e. The stock basis is $2,000.

d. The loan basis is now $10,000. The "net increase" of $2,000 ($10,000 - $8,000) is first used to increase the loan basis back to $10,000. The stock basis is zero ($8,000 - $8,000), and there is no long-term capital gain.

The following facts relate to a one-shareholder S corporation. What is the shareholder's ending stock basis? Ordinary income $100,000 Payroll tax penalty 2,140 Stock purchases 32,000 Tax-exempt insurance proceeds 50,000 Insurance premiums paid (nondeductible) 2,700 Beginning stock basis 36,800 a. $216,100 b. $181,960 c. $163,960 d. $218,240 e. $213,960

e. $213,960 The shareholder's ending stock basis is $213,960 ($36,800 + $100,000 + $32,000 - $2,140 + $50,000 - $2,700).

Which of the following is a requirement to qualify as a small business corporation? a. It has four classes of stock. b. It is a domestic or foreign corporation. c. It is a non-U.S. bank or insurance company. d. It has no resident aliens. e. It is limited to a theoretical maximum of 100 shareholders.

e. It is limited to a theoretical maximum of 100 shareholders. A small business corporation theoretically is limited to 100 shareholders. Several exceptions, though, allow the number of shareholders to exceed 100. In addition, it must be a domestic corporation, with only one class of stock, and have no nonresident alien shareholders.

Parcel, Inc., an S corporation for 15 years, distributes a tract of land held as an investment to Sheryl, its majority shareholder. The land was purchased for $90,000 five years ago and currently is worth $60,000. As a result of this distribution: a. Sheryl takes a basis of $90,000 in the land. b. The $30,000 loss is recognized by Sheryl. c. The $30,000 loss is recognized at the corporate level. d. Sheryl takes a basis of $30,000 in the land. e. Parcel recognizes $15,000 of the loss and Sheryl recognizes $15,000 of the loss.

e. Parcel recognizes $15,000 of the loss and Sheryl recognizes $15,000 of the loss. The loss of $30,000 ($90,000 purchase price - $60,000 market value) is not recognized at the corporate level or at the shareholder level. The shareholder's basis in the property is $60,000, its fair market value.

Paper, Inc., an S corporation for 15 years, distributes a tract of land held as an investment to Esther, its majority shareholder. The land was purchased for $70,000 five years ago and currently is worth $30,000. As a result of this distribution: a. Paper takes a basis of $40,000 in the land. b. The $40,000 loss is recognized at the corporate level. c. Esther takes a basis of $70,000 in the land. d. The $40,000 loss is recognized by Esther. e. The loss of $40,000 decreases Paper's AAA.

e. The loss of $40,000 decreases Paper's AAA. The loss of $40,000 ($70,000 purchase price - $30,000 market value) is not recognized at the corporate level, but does reduce Paper's AAA. Esther's basis in the land is its fair market value of $30,000.

Chapter 23: S-Corps (Study Tools)

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