Tax Accounting Ch17

Davis Corp. operated as a C corporation until the start of this year when it elected S corporation status. At the time of the S election, Davis had $3,000 of E&P. During the year, Davis recognized $25,000 of ordinary business income, had $2,500 of dividend income and $1,500 of long-term capital loss. Assume Davis makes a distribution of $30,000. What is the balance in Davis' AAA at year end?

$0

Davis Corp. operated as a C corporation until the start of this year when it elected S corporation status. At the time of the S election, Davis had $3,000 of E&P. During the year, Davis recognized $25,000 of ordinary business income, had $2,500 of dividend income and $1,500 of long-term capital loss. Assume Davis makes a distribution of $25,000. What is the balance in Davis' AAA at year end?

$1,000

Davis Corp. operated as a C corporation until the start of this year when it elected S corporation status. At the time of the S election, Davis had $3,000 of E&P. During the year, Davis recognized $25,000 of ordinary business income, had $2,500 of dividend income and $1,500 of long-term capital loss. Assume Davis makes a distribution of $28,000. What is the balance in Davis' E&P at year end?

$1,000

Charlene's adjusted basis in S corporation stock was $10,000. Her share of S corporation losses was $22,000. On the last day of the year, she sells her entire interest in the S corporation. How much loss from the current year operations can Charlene deduct under the basis rules?

$10,000

David purchases Landon's shares in an S corporation for $100,000. Landon's basis was $80,000 at the time of the sale. What is David's basis in the S corporation shares?

$100,000

Houser Corp. had the following assets when it converted to an S corporation: Cash $3,500, Accounts receivable $6,000 (basis = $6,000), Inventory (FIFO basis) $40,000 (basis = $46,000), and Land $89,000 (basis = $72,000) What is Houser's net unrealized built-in gain at conversion?

$11,000

Charlie's adjusted basis in S corporation stock was $12,000. His share of S corporation losses was $22,000. How much of the loss clears the basis limitation and what is the treatment of the remaining loss (if any)?

$12,000 clears the basis limit; the remaining $10,000 is suspended

Steven, Jennifer and Randy are all 1/3 shareholders in a calendar year-end S corporation that generated $90,000 of business income this year (not a leap year). Randy suffered some health issues earlier in the year and was required to sell his shares equally to Steven and Jennifer on June 29 to generate some cash to pay his medical bills. How much S corporation business income will be allocated to Randy using the daily method?

$14,795

Jewel is a shareholder in a calendar year-end S corporation that she formed as an S corporation two years ago. Jewel's basis at the start of the year was $2,000. Her share of ordinary income for this year was $17,000. She was also allocated $2,000 of tax-exempt income as a separately stated item. The S corporation made a $25,000 operating distribution to Jewel. What is the amount of income and character to Jewel and her basis in the S corporation at year-end?

$17,000 ordinary income; $21,000 tax-free return of capital; $4,000 long-term capital gain; her basis is $0

Glenda owns shares (50%) in an S corporation (always an S corporation) and also has a separate partnership investment (25% partner). In the current year, the S corporation recognizes $50,000 of ordinary income, but pays no distributions to Glenda. Glenda's basis in the partnership is $20,000. The partnership recognizes only $3,000 of business income, but makes a $14,000 distribution to Glenda. How much income will Glenda include in her current year return from the above investments?

$25,750

Neymar had basis of $16,000 in an S corporation at the beginning of the year. The S corporation reported a $30,000 ordinary loss (Neymar's share) for the year. Neymar loaned $18,000 to the S corporation during the year. How much loss can Neymar deduct under the basis rules?

$30,000

Lionel contributed $20,000 cash and land worth $100,000 (adjusted basis = $75,000) to an S corporation. The land was subject to a mortgage originated 5 years ago with a balance of $55,000 that was assumed by the S corporation. What is Lionel's basis in his S corporation stock after the transfer?

$40,000

Reynaldo contributes cash of $45,000 and property worth $55,000 (basis = $12,000) to form an S corporation. What is Reynaldo's basis in the S corporation shares?

$57,000

Papa received a distribution of land from his S corporation in a liquidating distribution. The land had a fair market value of $67,000 and a basis to the S corporation of $32,000. The S corp was always an S corporation. What is Papa's basis in the land?

$67,000

Helen owns 51% of Troy Corp., an S corporation with a calendar year-end. Helen receives the following from Troy: wages $62,000; health insurance paid by Troy for Helen $5,600; qualified employee discounts provided to Helen $680; payment of Helen's college tuition to become an engineer of $4,000. What is Helen's taxable compensation based on the above?

$67,600

Yazou Corp. was formed as a calendar year S corporation with 3 shareholders. On August 15 of the current year (not a leap year), one of the shareholders sold his shares to a corporation, terminating the S corporation election. Yazou's accounting records reflect business income of $75,000 through August 15 and $45,000 from August 16 through December 31. Calculate Yazou's S corporation short year income, using both the daily method and the specific identification method.

$74,630 under the daily method and $75,000 under specific identification method

The excess passive investment income tax is applied currently at what rate?

21%

Rolando works for an S corporation for which he is the sole shareholder. Although he provides an extensive amount of services on behalf of the S corporation, he does not pay himself any salary, electing only to make distributions to himself at year end. How might the IRS treat those distributions?

As salary to the extent of reasonable compensation for Rolando's services

What are the loss limitations that apply to S corporations? (Check all that apply.) At-risk Tax basis Capital loss Passive activity

At-risk Tax basis Passive activity

Gouda Corp. is an S corporation with a May 31, year-end. What is the due date and extended due date for Gouda's federal income tax return?

August 15 and February 15 of next year

If Karen's basis in her S Corporation stock is $30,000 and she receives a cash distribution of $40,000, she will report $____ of ordinary income and $____ of capital gain income from the distribution.

Blank 1: 0 or zero Blank 2: 10,000

The LIFO recapture amount is excess of the inventory basis using the _____ method, less the inventory basis using the _____ method.

Blank 1: FIFO Blank 2: LIFO

Hungry, Inc., a calendar year S corporation, wishes to terminate its S election in the current year. In order to do so, Hungry must file a valid termination by no later than ____ 15th of the current year.

Blank 1: March

S corporation shareholders are not allowed to deduct excess _____ losses.

Blank 1: business

S corporations make accounting period and method elections at the _____ level.

Blank 1: entity, corporate, company, corporation, or business

The built-in gains tax recognition period is the first ____ years a former C corporation operates as an S corporation.

Blank 1: five or 5

Foggy Bottom Corp., an S corporation, recognized net long-term capital gains during the year. If the gains are simply lumped together with ordinary business income on Schedule K-1, then the shareholders are going to report the income as ordinary and, as a result, fail to enjoy the preferential tax rates on long-term capital gains. Instead, the S corporation will report the gains as one of its ____ ____ _____ on Schedule K-1.

Blank 1: separately Blank 2: stated Blank 3: items or item

For tax purposes, an S corporation is organized, reorganized and liquidated in a similar fashion to a:

C corporation

Jane wishes to contribute property and cash to an S corporation. The tax rules that apply are similar to those of a:

C corporation.

At the end of the tax year, DHG Corp, always an S corporation, made a liquidating distribution of long-term capital gain property to Sue, a 40% shareholder in DHG. The property has a fair market value of $50,000 and DHG's basis in the property is $30,000. Sue's basis in DHG is $8,000 before the distribution. What are DHG's and Sue's gain or loss on the liquidating distribution?

DHG gain of $20,000; Sue's gain is $42,000

Which of the following are non-taxable fringe benefits for >2% shareholders? (Check all that apply.) Meals provided for the convenience of the employer Dependent care assistance programs Employer-provided health insurance De minimis fringes Education assistance programs

Dependent care assistance programs De minimis fringes Education assistance programs

Samantha and Darren are 50% owners in Black Hat Corp., a calendar year S corporation. Exactly one-half way through the year, Samantha sold her shares to Endora. The financial results of Black Hat using normal accounting rules are as follows: Income through June 30 = $34,000; income from July 1 - Dec 31 = $76,000 for total income for the year of $110,000. Which of the following statements is true?

Endora would be allocated more income and Samantha would be allocated less income if Black Hat uses normal accounting method to determine the allocations.

S Corporation distributions are never taxable to shareholders.

False

Which of the following is NOT a method by which income can be allocated between a short S corporation tax year and a short C corporation tax year?

First-in, first-out method

Tomato, Inc. made a valid S election some number of years ago. Now it wishes to terminate that election. What percentage of ownership needs to agree with the termination decision?

Greater than 50%

Which of the following is a separately stated item for a partnership, but is NOT a separately stated item for an S corporation?

Guaranteed payments

Toastbusters Corp., a calendar year-end S corporation, generates 80% of its income from the sale of toasters. Toastbusters has had over $100 million in average annual gross receipts for each of the past 5 years. What tax accounting methods would be permitted for Toastbusters? (Check all that apply.)

Hybrid Accrual

Which of the following are separately stated items for an S corporation? (Check all that apply.) MACRS depreciation on business assets Reasonable wages paid to S corporation owners Interest income Section 1231 gains Charitable contributions

Interest income Section 1231 gains Charitable contributions

Which of the following is MOST likely to prevent a valid S corporation election?

Issuing both common and preferred stock, but to the same shareholders

Kileau Corp., a calendar tax-year S corporation, terminated its S corporation status on September 22, 2016 when it failed the shareholder requirements. What is the first date on which Kileau can re-elect S status?

January 1, 2021

Removal Inc. is a calendar year-end S corporation. On July 1 of the current year, Wayne, a Removal shareholder, sells his shares to the Kastle Corporation. Removal's S election is terminated on:

July 1 of the current year

Toonit, Inc., a May 31 fiscal year-end S corporation, files an S corporation termination on September 1, 2021. Toonit will no longer be treated as an S corporation on:

June 1, 2022, if no termination date is specified

The due date for a calendar year-end S corporation is:

March 15th

TooEarly, Inc. is a calendar year corporation. On January 3rd of the current year at the request of TooEarly management, Grand Slam Inc., TooEarly's only corporate shareholder, sells all its shares of TooEarly stock to Bill Brady, an individual. On January 5th of the current year TooEarly files for S corporation status. What is the first year TooEarly will be eligible for S corporation treatment?

Next Year

Robustness, Inc., a C corporation, wishes to organize a wholly-owned subsidiary that will operate as an insurance company. Can the subsidiary operate as a valid S corporation?

No

Hialeah Corp. is a calendar year S corporation. In the current year, one of Hialeah's lesser shareholders (<1%) sold his shares to another individual. Due to a mix up by the attorneys handling the sale, the shares were inadvertently transferred to a corporation as owner. As soon as reasonably possible, the shares were re-titled into the hands of the individual. Must Hialeah wait until the start of the fifth year to re-elect S corporation status?

No; Hialeah should try and seek IRS consent for an earlier change in order to skip the 5-year waiting period.

Which of the following is NOT included in a shareholder's at-risk amount for S corporations?

Nonrecourse loan amount in excess of the net fair market value of property used as collateral for the loan

Which entity can pay the fewest non-taxable fringe benefits to significant owners?

Partnerships

Marcelo had debt basis of $4,000 and stock basis of $3,000 in an S corporation that reported his share of a loss as $6,000. In the following year, the S corporation reported Marcelo's share of income as $5,000. The level of debt outstanding between Marcelo and the Corporation didn't change in the following year. What is Marcelo's stock basis and debt basis at the end of the following year?

Stock basis of $2,000; debt basis of $4,000

Which of the following are required in order for the excess net passive income tax to apply? (Check all that apply.) The S corporation previously operated as a C corporation The S corporation has a partnership as a shareholder There is accumulated E&P from a prior C corporation at year-end Passive investment income > 25% of gross receipts

The S corporation previously operated as a C corporation There is accumulated E&P from a prior C corporation at year-end Passive investment income > 25% of gross receipts

Which of the following are required in order to apply the built-in gains tax on an S corporation? (Check all that apply.) The S corporation was converted from a C corporation. The S corporation must have converted into a C corporation. The S corporation must recognize net built-in gains during a fixed number of years. There were net unrealized built-in gains at the time of conversion to an S corporation.

The S corporation was converted from a C corporation. The S corporation must recognize net built-in gains during a fixed number of years. There were net unrealized built-in gains at the time of conversion to an S corporation.

S corporations are generally required to use a calendar year-end.

True

The application of passive activity loss rules is identical for S corporations and partnerships.

True

How many years must a previous S corporation wait after the termination to re-elect S corporation status?

Until the start of the fifth year after the year of termination

Bruce and Ivy, a married couple, represented the 100th shareholder in an S corporation. Bruce and Ivy were divorced in the current year, each taking one-half of the S corporation shares they held. Is the S corporation election still allowed?

Yes

The first limit applied to S corporation losses is the:

basis limitation

In order for a corporation to be treated as an S corporation, it must (Check all that apply.) be organized in the U.S. or the law of any state in the U.S. have an unlimited number of shareholders. have only one class of stock. have only individual shareholders. make an affirmative election.

be organized in the U.S. or the law of any state in the U.S. have only one class of stock. make an affirmative election.

When an S corporation shareholder receives a property distribution (no previous E&P), the shareholder will reduce their basis in the S corp stock by the:

fair market value of the property received

Which of the following types of entities or persons may be as an S corporation shareholder? (Check all that apply.) grantor trust C corporation U.S. resident qualified retirement plan trust partnership

grantor trust U.S. resident qualified retirement plan trust

The tax rate used to calculate the built-in gains tax is the:

highest current corporate tax rate

The LIFO recapture tax: (Check all that apply.) is due in four annual installments, starting with the due date of the final C corporation return. is calculated based on a flat 15% tax rate. requires a C corporation to include a LIFO recapture amount in income the last year of C corporation status. prevents former C corporations from avoiding built-in gains by using the LIFO method. Need help? Review th

is due in four annual installments, starting with the due date of the final C corporation return. requires a C corporation to include a LIFO recapture amount in income the last year of C corporation status. prevents former C corporations from avoiding built-in gains by using the LIFO method.

Beetroot, Inc. is a calendar year-end S corporation. On February 1 of the current year, Hans, a Beetroot shareholder moves to Germany to get married and is no longer a U.S. tax resident. Hans realizes his mistake and immediately sells his shares in Beetroot to a U.S. tax resident on February 14th. Beetroot's S election

is not likely terminated.

The loss limitation applied after the basis and at-risk limitations:

is the passive loss limitation

Which of the following may NOT be an S corporation shareholder?

limited partnership

Jurgen's deduction from his share of S corporation loss is limited by his basis. One way Jurgen could try and increase his loss deduction is to:

loan money directly to the S corporation

A Form 2553 is used to:

make an S corporation election

The net gain that an S corporation would recognize if it sold each asset at its fair market value on the first day after converting from a C corporation to an S corporation is the

net unrealized built-in gain.

Juliana was a shareholder in a calendar year S corporation that terminated its S status on May 3. At the time of the termination, Juliana's stock and debt basis were zero, and she had suspended losses of $13,000. Juliana's suspended losses are:

not deductible unless additional basis is created during the PTTP

Ordinary business income allocated to shareholders by an S corporation is typically treated as

ordinary income NOT subject to self-employment taxes.

When an S corporation distributes appreciated property to a shareholder, the S corporation will:

recognize gain as if the property sold for fair market value just prior to the distribution

The post-termination transition period (PTTP) for an S corporation ends:

the later of one year after the last day as an S corporation or the filing deadline (including extension) for the last S corporation return

The net recognized built-in gain for any year is the least of: (Check all that apply.) the net recognized built-in gains less net recognized built-in gains from prior years. the net recognized built-in gains and losses for the year. the net unrealized built-in gains at conversion less the net recognized built-in gains in previous years. taxable income for the year without the DRD and NOL.

the net recognized built-in gains and losses for the year. the net unrealized built-in gains at conversion less the net recognized built-in gains in previous years. taxable income for the year without the DRD and NOL.

When an S corporation distributes property that has depreciated in value (fair market value less than basis) to a shareholder, the S corporation will:

treat the distribution as if at FMV, but no loss will be recognized

The accumulated adjustments account (AAA) is:

used to determine the taxation of S corporation distributions, where the history of the corporation includes a C corporation with E&P