BLAW 7 8

Which of the following statements about stock ownership is not​ correct? A. A C corporation can own stock of an S corporation. B. An S corporation can own stock of a Qualified Subchapter S Subsidiary. C. A tax−exempt charity can own stock of an S corporation. D. An S corporation can own stock of a C corporation.

A C corporation can own stock of an S corporation.

Identify which of the following statements is true. A. A testamentary trust can be converted into a QSST trust. B. A trust can own S corporation stock and have a C corporation as a beneficiary as long as the corporation is the sole beneficiary. C. A QSST is an arrangement whereby the stock owned by a number of shareholders is placed under trust control for purposes of exercising the stock voting rights. D. All of the above are false.

A testamentary trust can be converted into a QSST trust.

Which one of the following special loss limitations applies to an S​ corporation? A. hobby loss rules B. at−risk rules C. passive activity limitation rules D. All of the above apply.

All of the above apply.

Identify which of the following statements is true. A. Perry​ Corporation, an S​ corporation, receives​ $10,000 of dividends from a ​25%−owned domestic corporation. Perry is allowed an​ 80% dividends−received deduction with respect to the distribution. B. An NOL is incurred by a C corporation in the current tax year. The C corporation makes an S election for the following tax year. The entire C corporation NOL carryover can be passed through to the S​ corporation's shareholders at the end of the following tax year. C. Tax−exempt interest earned by an S corporation is not reported to its shareholders because it is excluded from the​ shareholders' gross income. D. All of the above are false.

All of the above are false.

Identify which of the following statements is true. A. An S corporation generally will not owe the built−in gains tax if the corporation has never been a C corporation. B. Beach​ Corporation, an S​ corporation, has gross receipts of​ $240,000; taxable income of​ $120,000; passive investment income of​ $100,000; and expenses directly attributable to the passive investment income of​ $20,000. The​ corporation's excess net passive income is​ $32,000. C. The built−in gains tax applicable to S corporations can be avoided if the property is held for ten years. D. All of the above are true.

All of the above are true.

Identify which of the following statements is true. A. An election for an S corporation to use the Sec. 179 expensing election is made by the corporation and not by its shareholders. B. An S corporation cannot claim a dividends−received deduction. C. The S​ corporation's separately stated items are in general the same ones that apply in partnership taxation. D. All of the above are true.

All of the above are true.

Identify which of the following statements is true. A. The S corporation rules were enacted to allow small corporations to enjoy the nontax advantages of the corporate form of business without being subject to the tax disadvantage of double taxation. B. A partnership can elect to be taxed as a corporation under the check−the−box regulations. As a​ corporation, an S election can be made. C. For C corporations that desire to be taxed like a​ partnership, the S corporation rules provide a practical alternative for an existing C corporation to obtain many of the tax benefits of being taxed as a partnership. D. All of the above are true.

All of the above are true.

What limitations apply to the amount of loss​ pass-through an S corporation shareholder can​ deduct?

Each​ shareholder's deduction for his or her share of the ordinary loss and the separately stated loss and deduction items is limited to the sum of the adjusted basis for his or her S corporation stock plus the adjusted basis of any indebtedness owed directly by the S corporation to the shareholder.

What happens to any losses exceeding this​ limitation? What happens to losses if the shareholder transfers his or her​ stock?

Excess loss and deduction items carry over to subsequent years in which the shareholder again has a positive basis amount. Unused losses lapse if the shareholder transfers his or her stock to anyone other than a spouse or former spouse incident to a divorce.

Cactus​ Corporation, an S​ Corporation, had accumulated earnings and profits of​ $100,000 at the beginning of 2018. Tex and Shirley each own​ 50% of the stock. Cactus does not make any distributions during​ 2018, but had​ $200,000 of ordinary income. In​ 2019, ordinary income was​ $100,000 and distributions were​ $100,000. What is​ Tex's ordinary income for​ 2018? A. ​$0 B. ​$100,000 C. ​$200,000 D. ​$50,000

IN 2018​ $100,000

Cactus​ Corporation, an S​ Corporation, had accumulated earnings and profits of​ $100,000 at the beginning of 2018. Tex and Shirley each own​ 50% of the stock. Cactus does not make any distributions during​ 2018, but had​ $200,000 of ordinary income. In​ 2019, ordinary income was​ $100,000 and distributions were​ $100,000. What is​ Tex's ordinary income for​ 2019? A. ​$50,000 B. ​$100,000 C. ​$200,000 D. ​$0

IN 2019 ​$50,000

How does the existence of such​ E&P affect the S​ corporation's ability to earn passive​ income?

If an S corporation has​ E&P at the close of a tax year it is subject to the excess net passive income tax if its passive investment income for the tax year exceeds​ 25% of its gross receipts. It prevents the corporation from earning an unlimited amount of passive investment income and being exempt from the excess net passive income tax.

Identify which of the following statements is false. A. A C corporation short−year income tax liability must be determined on an annualized basis. B. A corporation can obtain relief for a late S election if the IRS consents. C. If an S election is terminated and the termination is not considered to be​ inadvertent, a ten−tax−year waiting period is required before making a new election. D. If the termination of an S election is considered to be​ inadvertent, then the election is permitted to continue in place as if the termination had never occurred.

If an S election is terminated and the termination is not considered to be​ inadvertent, a ten−tax−year waiting period is required before making a new election.

Which of the following classifications make a shareholder ineligible to own stock in an S​ corporation? a. U.S. citizen b. Domestic corporation c. Partnership where all the partners are U.S. citizens d. Estate of a deceased U.S. citizen e. Grantor trust created by a U.S. citizen f. Nonresident alien individual

Items​ b, c and f would be ineligible shareholders in an S corporation.

julio, age​ 50, is a U.S. citizen who has a​ 22% marginal tax rate. He has operated the​ A&B Automotive Parts Company for a number of years as a C corporation. Last​ year, A&B reported​ $200,000 of​ pre-tax profits, from which it paid​ $50,000 in salary and​ $25,000 in dividends to Julio. The corporation expects this​ year's pre-tax profits to be​ $300,000. To​ date, the corporation has created no fringe benefits or pension plans for Julio. Julio asks you to explain whether an S corporation election would reduce his taxes. How do you respond to​ Julio's inquiry?

Many items must be considered when converting a C corporation to an S corporation. Julio must compare his and the​ corporation's potential tax liabilities under both the C and S corporation scenarios. His marginal tax rate is only slightly higher than the C corporation tax​ rate, but his dividend income is taxed at the applicable capital gains rate. If Julio elects S corporation​ status, the entire amount of corporate income would be taxable to him regardless of whether the corporation distributes it. ​Accordingly, much of the income would be taxed at the individual marginal rate of 22% or higher. The​ $25,000 in dividends currently being paid would not be subject to the double taxation under the current C corporation status if the corporation made an S election. The income passed through to Julio will step-up the basis of Julio's S corporation stock. He also must consider the possible effect of the built-in gains tax that could arise during the first five years after a C corporation converts to an S corporation.

On June 30 of the current​ year, the S election of Great Corporation is​ terminated, thus creating a six−month S short year and a six−month C short year. Great Corporation is a calendar−year taxpayer. The S short−year return is due A. September 15. B. March 15 of the next year. C. December 15. D. June 30 of the next year.

March 15 of the next year.

Davies Corporation is a calendar−year taxpayer that is owned equally by​ Vivian, Rob,​ Danny, and Doug Davies. At the close of business on May​ 31, Rob Davies sells his​ 25% stock interest to Paula Bryan. Which of the following statements about the S election is correct​? A. A new S election form must be filed by June 30 of the same​ year, with all shareholders consenting to the election. If a new S election is not​ filed, the election terminates on June 30 of that year. B. Paula has 30 days to terminate the S​ election, otherwise the election remains in place for the entire year and all subsequent years. C. Paula must consent to the S​ election, otherwise the election terminates at the close of business on May 31. D. None of the above statements are correct.

None of the above statements are correct.

Which of the following corporate tax levies are imposed on an S​ corporation? A. corporate alternative minimum tax B. None of these taxes are imposed on an S corporation. C. accumulated earnings tax D. corporate income tax

None of these taxes are imposed on an S corporation.

Dilley Corporation is an electing S corporation that uses a calendar year as its tax year. On October​ 31, Dilley's S election is terminated because of the acquisition of stock by an ineligible stockholder. Dilley Corporation shareholder Alan is allocated an S corporation loss for the​ year, which cannot be used because of the basis limitation. Alan will lose the unused loss if not used by

October 31 of next year.

What actions must the S corporation and its shareholders take to correct an inadvertent​ termination?

Once such a determination is​ made, the S corporation or its shareholders must take the necessary​ steps, within a reasonable time period after discovering the event causing the​ termination, to restore its small business corporation status by distributing the money or property needed to eliminate the​ E&P balance.

Which of the following would terminate a Subchapter S​ election? A. Grantor trust becomes a shareholder. B. Partnership becomes a shareholder. C. Estate becomes a shareholder. D. Voting trust becomes a shareholder

Partnership becomes a shareholder.

Identify which of the following statements is true. A. S corporation consent by shareholders is binding on the current tax year and all future tax years. B. Shareholders who acquire stock in an S corporation after the election date and prior to the​ election's effective date must consent to the election. C. Only shareholders who own stock on the date an S election takes effect must consent to the election. D. All of the above are false.

S corporation consent by shareholders is binding on the current tax year and all future tax years.

At the time Cable Corporation makes its S​ election, it elects to use a fiscal year based on a Sec. 444 election. What other requirements must Cable satisfy to continue to use its fiscal year election for future tax​ years?

To maintain a fiscal year under a Sec. 444​ election, Cable must choose a​ year-end of September​ 30, October​ 31, or November 30 so the deferral period is three months or less. The corporation also must make the required payments mandated under Sec. 7519 and file a Form 8752 annually.

Trusts that can own S corporation stock include all of the following except A. QSSTs. B. charitable remainder unitrusts. C. grantor trusts. D. testamentary trusts.

charitable remainder unitrusts.

King​ Corporation, a cash method taxpayer that uses the calendar year as its tax​ year, was incorporated on June​ 1, 1984. The corporation made its initial S election on December 1 of last​ year, effective for the current tax year. Earnings and profits of​ $60,000 have been retained from C corporation tax years. Which one of the following events results in the recognition of a built−in ​gain? A. collection of accounts receivable in the current year that resulted from services performed last year B. collection of dividends declared on April 5 of the current year on stock purchased on February 14 of the current year C. collection of interest income earned in the current year on bonds purchased on January 1 of last year D. None of the above are built−in gains.

collection of accounts receivable in the current year that resulted from services performed last year

Which of the following conditions will not cause an S election to be​ terminated? A. selecting an improper tax year B. failing to file a timely tax return C. exceeding the 100−shareholder limit D. creating a second class of stock having a dividend preference

failing to file a timely tax return

The recognition period for the built−in gains tax extends for how many years after the S election takes​ effect? A. three years B. one year C. five years D. ten years

ten years

For an S corporation to elect to use a fiscal year other than a permitted​ year, the fiscal year elected must have a maximum deferral period of A. two months. B. one month. C. six months. D. three months.

three months.

An S corporation reports ordinary income of​ $120,000 after deducting​ $20,000 for​ Fred's salary. Fred and his three children own the S corporation equally. The IRS determines​ Fred's stock transfer to his three children is not bona fide. Reasonable compensation for Fred is​ $40,000. How much of the S​ corporation's $140,000 pre−salary income must be reported by​ Fred? A. ​$140,000 B. ​$100,000 C. ​$40,000 D. ​$50,000

​$140,000

Helmut and Sergei own all the stock of Zappo​ Corporation, a calendar−year domestic corporation. On January 30 of the current​ year, Sergei sells his entire interest in the Zappo stock to Nils. All three individuals are U.S. citizens. Can an S election be made for the current​ year? A. not for the current year but for the next year B. ​Yes, if Helmut and Nils agree to report all of the​ corporation's income for the entire year C. ​Yes, if Sergei will also join in the election with Helmut and Nils D. ​Yes, if Helmut and Nils agree to file a short−period return and Sergei also agrees to the return

​Yes, if Sergei will also join in the election with Helmut and Nils

Train Corporation is an S corporation that is owned equally by Carlos and Diane at the beginning of the year. On April 21​ (the 111th day of​ Train's tax​ year) of the current​ year, Carlos sells all of his Train Corporation stock to Andre. How many days will be used when computing​ Carlos's share of S corporation income for this year​ (a non−leap ​year), assuming that a special income allocation election is not​ made?

111

April​ Corporation's Subchapter S election was voluntarily terminated for 2015. The first year that April would be eligible to reelect S corporation status is A. 2018. B. 2020. C. 2017. D. 2016.

2020.

The passive income test relating to an S corporation election is applied A. quarterly. B. annually. C. monthly. D. daily.

annually.

List five disadvantages of making an S election. ​(Select all that​ apply.)

A. An S corporation​ shareholder's marginal tax rate on​ pass-through income may be higher than the​ 21% tax rate that would apply if the entity were a C corporation. Your answer is correct. B. Dividends received by the S corporation are not eligible for the​ dividends-received deduction, as is the case for a C corporation. Your answer is correct. C. The S​ corporation's earnings are taxed to the shareholders even though they are not distributed. This treatment may require the corporation to make distributions or salary payments so the shareholder can pay taxes owed on the S​ corporation's earnings. S corporations are subject to an excess net passive income tax and a​ built-in gains tax. Partnerships are not subject to either of these taxes. Your answer is correct. H. Allocation of ordinary income or loss and the separately stated items is based on the stock owned on each day of the tax year. Special allocations of particular items are not​ permitted, as they are in a partnership.

Lance and Rodney are contemplating starting a new business to manufacture computer software games. They expect to encounter losses in the initial years.​ Lance's CPA has talked to them about using an S corporation.​ Rodney, while reading a business​ publication, encounters a discussion on limited liability companies​ (LLCs). The article talks about the advantages of using an LLC instead of an S corporation. How would you respond to their​ inquiry? A. An S corporation is not subject to​ corporate-level taxes which is advantageous to Lance and Rodney who will be starting a new business and will not have the excess cash to pay the taxes required in an LLC. B. An LLC has no restrictions on the type or number of owners. An S corporation is limited to 100​ shareholders, none of which may be a corporation or a partnership. C. The basis of the S corporation​ shareholder's interest includes a ratable share of the S​ corporation's liabilities. This amount can be greater than the basis in the S​ corporation's stock and permits a greater loss or deduction​ pass-through. D. S corporations are​ flow-through entities that simplify the accounting books and records. An LLC is a complex entity to set up and requires many difficult calculations.

An LLC has no restrictions on the type or number of owners. An S corporation is limited to 100​ shareholders, none of which may be a corporation or a partnership.

Identify which of the following statements is true. A. A partnership can be an S corporation shareholder. B. An S corporation can have more than 100​ shareholders, since families are treated as a single shareholder. C. A nonresident alien can be an S corporation shareholder. D. All of the above are false.

An S corporation can have more than 100​ shareholders, since families are treated as a single shareholder.

Identify which of the following statements is true. A. The terms​ "small business​ corporation" and​ "S corporation" are synonymous. B. An S corporation should have a buy−sell agreement to guard itself against an ill−advised sale of its stock. C. A regular corporation has common and preferred stock outstanding on January 1. On January​ 2, the preferred stock is canceled in a​ recapitalization, leaving only common stock outstanding. The corporation can make an S election for this tax year. D. All of the above are false.

An S corporation should have a buy−sell agreement to guard itself against an ill−advised sale of its stock.

Identify which of the following statements is true. A. An S corporation cannot own any stock of another corporation. B. An S corporation cannot own​ 100% of the stock of another S corporation. C. An S corporation that owns all of the stock of a Qualified Subchapter S Subsidiary​ (QSub) must report all the​ income, deductions, and losses of the subsidiary on its own tax return. D. All of the above are true.

An S corporation that owns all of the stock of a Qualified Subchapter S Subsidiary​ (QSub) must report all the​ income, deductions, and losses of the subsidiary on its own tax return.

Identify which of the following statements is true. A. A revocation of an S corporation election can be retrospective to any date. B. An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C​ E&P. C. All of the shareholders of an S corporation must consent to a revocation of the S election. D. All of the above are true.

An S election will not be terminated due to excess passive income if the corporation does not have Subchapter C​ E&P.

What is an inadvertent​ termination?

An inadvertent termination is one where the​ IRS, corporation, and shareholders all agree was unintentional​ (e.g., failing the passive investment income test for three consecutive years as a result of improperly computing the​ corporation's Subchapter C​ E&P).

What is a​ post-termination transition​ period? What loss carryovers can an S corporation shareholder deduct during this​ period? A. A​ two-year period during the time leading up to the termination of the S​ corporation's last tax return which will include the​ shareholder's income and losses to be allocated. Shareholders can deduct loss carryovers during this period only if they pass the​ at-risk rules. B. A​ 120-day period beginning on the determination date. This is the date on which the court decision becomes final or a closing agreement is entered into. Shareholders of an S corporation can deduct loss carryovers up to their adjusted basis of the stock. The S corporation also deducts the loss carryovers on its final tax return. C. A​ one-year period immediately following the last day of the final S corporation tax year in which loss and deduction carryovers can be used by the S​ corporation's shareholders even though the S election has been revoked or terminated. Loss carryovers can be deducted only up to the adjusted basis of the​ shareholder's stock at the end of the​ post-termination transition period. D. None of the above.

A​ one-year period immediately following the last day of the final S corporation tax year in which loss and deduction carryovers can be used by the S​ corporation's shareholders even though the S election has been revoked or terminated. Loss carryovers can be deducted only up to the adjusted basis of the​ shareholder's stock at the end of the​ post-termination transition period.

Identify which of the following statements is false. A. A​ shareholder's S corporation stock basis will increase when the shareholder acts as guarantor on a corporate indebtedness. B. Randy is a shareholder in an S corporation. His stock basis is​ $10,000 and his basis in a loan he made to the corporation is​ $3,000. Randy's share of the​ corporation's ordinary loss for the current year is​ $11,000. Ignoring the at−risk and passive activity​ limitations, Randy can deduct the loss in full. C. Debt basis is restored before stock basis. D. A​ shareholder's ratable share of the S​ corporation's ordinary loss reduces the adjusted basis of​ his/her S corporation stock. Once the basis of the stock is reduced to​ zero, any loss−passthrough that remains reduces the basis of S corporation debts that are owed to the shareholder.

A​ shareholder's S corporation stock basis will increase when the shareholder acts as guarantor on a corporate indebtedness.

Identify which of the following statements is true. A. A majority of shareholders must consent to the S corporation election. B. Convertible debt issues might be considered​ "stock" for purposes of the S corporation single class of stock requirement. C. The S election must be made no later than the fifteenth day of the fourth month of the tax year for which the election is to be effective. D. All of the above are false.

Convertible debt issues might be considered​ "stock" for purposes of the S corporation single class of stock requirement.

What tax years can a newly created corporation that makes an S election adopt for its first tax​ year? If a fiscal year is​ permitted, does it require IRS​ approval? A. An S corporation generally must adopt a calendar year as its tax year. It can adopt a​ 52-53 week year as its natural business year with IRS approval. B. An S corporation can adopt a calendar year as its tax year or adopt a fiscal year. No IRS approval is required. C. S corporations must generally adopt a calendar year or a​ 52-53 week year as its tax year. With IRS​ approval, an S corporation may adopt a fiscal year which is its natural business year. D. S corporations must adopt a calendar year or a​ 52-53 week year as its tax year. They cannot adopt a fiscal year.

S corporations must generally adopt a calendar year or a​ 52-53 week year as its tax year. With IRS​ approval, an S corporation may adopt a fiscal year which is its natural business year.

Which of the following items is not separately stated for an S​ corporation? A. Section 1245 income B. short−term capital gain C. dividend income D. charitable contribution

Section 1245 income

Explain the procedures for allocating an S​ corporation's ordinary income or loss to each of the shareholders. What special allocation elections are​ available?

Separately stated items are allocated an equal portion of​ (1) the item to each day of the tax​ year, (2) the daily amount for the item to each share of stock outstanding on each​ day, (3) the total daily allocations for each outstanding share of​ stock, and​ (4) the total amounts allocated to each share of stock held by the shareholder. Special allocation elections are available only if the S election terminates in the tax year or if a shareholder no longer holds his or her entire S corporation stock interest.

A C corporation was formed five years ago and is a fiscal−year taxpayer with a June 30 year−end. The C corporation wants to make an S election for its tax year beginning in the current year. The election must be made by​ ________ (assuming permission can be obtained to continue using the fiscal year from the​ IRS). A. June 30 of the current year B. June 30 of the next year C. September 15 of the current year D. September 15 of the next year

September 15 of the current year

List five advantages of making an S election. ​

Splitting the S​ corporation's income among family members is possible.​ However, income splitting is restricted by the requirement that reasonable compensation be provided to family members who provide capital and services to the S corporation. Your answer is correct. E. The​ corporation's losses pass through to its shareholders and can be used to reduce the taxes owed on other types of income. This feature can be especially important for new businesses. The corporation can make an S​ election, pass through the​ start-up losses to the​ owners, and terminate the election once a C corporation becomes advantageous. Your answer is correct. F. ​Deductions, losses, and tax credits are separately stated and retain their character when passed through to the shareholders. These amounts may be subject to the various limitations at the shareholder level. This treatment can permit the shareholder to claim a tax benefit when it otherwise would be denied to the corporation​ (e.g., a shareholder can claim the general business credit benefit even though the S corporation reports a substantial loss for the​ year). Your answer is correct. G. The​ corporation's income is exempt from the corporate income tax. An S​ corporation's income is taxed only to its​ shareholders, whose tax bracket may be lower than a C​ corporation's tax bracket. Your answer is correct. H. Undistributed income taxed to the shareholder is not taxed again when subsequently distributed unless the distribution exceeds the​ shareholder's basis for his or her stock.

What are Subchapter C earnings and profits​ (E&P)?

Subchapter C​ E&P are profits that the S corporation inherited from a C corporation under the tax attribute carryover rules. Subchapter C​ E&P are profits earned in a tax year for which an S election was not in effect.

When a Sec. 444 fiscal−year election is​ made, the S corporation makes required payments to the IRS in order to continue to use the fiscal year as its tax year. Which of the following statements about the tax year is correct​? A. The Sec. 444 payment is allocated ratably to each shareholder and claimed as a tax payment on their own tax​ return(s). B. The Sec. 444 payments are refundable if the S election is terminated. C. The Sec. 444 payments must be made quarterly on the same dates that the S​ corporation's estimated tax payments are otherwise due. D. The Sec. 444 payment is deductible by the S corporation as an income tax.

The Sec. 444 payments are refundable if the S election is terminated.

Which one of the following is not one of the corporation−related requirements for S corporation​ status? A. The corporation must not have any foreign−sourced income. B. The corporation must be a domestic corporation. C. The corporation must not be an​ "ineligible" corporation. D. The corporation must have only one class of stock.

The corporation must not have any foreign−sourced income.

After an S corporation revokes or terminates its S​ election, how long must the corporation wait to make a new​ election? What circumstances permit an early​ reelection? A. The corporation must wait two tax years before making a new election. An early reelection can occur when​ (1) more than​ 25% of the​ corporation's stock is owned by persons who did not own stock on the date of the​ termination, or​ (2) the termination was intentionally caused by the​ 25% of​ shareholder's who are no longer part of the corporation. B. The corporation must wait five tax years before making a new election. An early reelection can occur when​ (1) more than​ 50% of the​ corporation's stock is owned by persons who did not own stock on the date of the​ termination, or​ (2) the termination was caused by events not reasonably within the control of the corporation or the shareholders owning a substantial interest in the corporation and was not part of a plan to terminate the election involving the corporation or its shareholders. C. The corporation must wait ten tax years before making a new election. An early reelection can only occur when the IRS reviews the corporation and determines the corporation was unethical in its termination of the S election to avoid paying a higher tax rate. D. The corporation must wait three tax years before making a new election. An early reelection can occur when​ (1) the shareholders appeal to the IRS stating they will not revoke the election for ten years or pay a​ penalty, or​ (2) the shareholders pay a fee to the IRS to allow for immediate reelection at their discretion.

The corporation must wait five tax years before making a new election. An early reelection can occur when​ (1) more than​ 50% of the​ corporation's stock is owned by persons who did not own stock on the date of the​ termination, or​ (2) the termination was caused by events not reasonably within the control of the corporation or the shareholders owning a substantial interest in the corporation and was not part of a plan to terminate the election involving the corporation or its shareholders.

Identify which of the following statements is true. A. Long−term capital gains may be subject to double taxation if the gains are subject to both the excess net passive income tax rules and the built−in gains tax rules. B. Special allocations of ordinary income or loss and separately stated items that are available for partnerships are also permitted with S corporations. C. When an S​ corporation's shares are sold by a shareholder during a tax​ year, the​ transferee's share of the earnings is reported from the day after the transfer date through the end of the tax year. D. All of the above are false.

When an S​ corporation's shares are sold by a shareholder during a tax​ year, the​ transferee's share of the earnings is reported from the day after the transfer date through the end of the tax year.

Mary, a U.S.​ citizen, owned​ 25% of the stock of Floran​ Corporation, an electing S corporation. At the time of her​ death, the Floran stock may go to all the following without affecting the S election except A. a charitable remainder unitrust. B. her estate. C. a testamentary trust. D. a small business trust.

a charitable remainder unitrust.

An S corporation is permitted to claim A. a net operating loss. B. a deduction based on the amortization of organizational expenditures. C. a personal exemption. D. the dividends−received deduction.

a deduction based on the amortization of organizational expenditures.

Will the following events cause an S election to​ terminate? Terminate an S election a. The S corporation earning 100% of its gross receipts in its first tax year from passive sources b. The S corporation issuing nonvoting stock that has a dividend preference c. The S corporation purchasing 100% of the single class of stock of a second domestic corporation that has conducted business activities for four years d. An individual shareholder donating 100 Shares of S corporation stock to a charity that is exempt from tax under Sec. 501(c)(3) e. The S corporation earning tax-exempt interest income

a no b yes c no d no e no

Which one of the following individuals or entities is ineligible to be an S corporation​ shareholder? A. a voting trust where all of the beneficiaries are U.S. citizens B. a partnership where all of the partners are U.S. citizens C. resident alien of the United States D. an estate

a partnership where all of the partners are U.S. citizens

​Celia, age​ 30, is leaving a major systems development firm to establish her own firm. She will design​ computer-based systems for​ small- and​ medium-sized businesses. Celia will invest​ $100,000 in the business. She hopes to operate near her breakeven point during her first​ year, although a small loss is possible. Profits will build up slowly over the next four years until she is earning​ $150,000 a year in her fifth year. Celia has heard about S corporations and asks you whether the S corporation form would be advisable for her new business. How do you respond to​ Celia's inquiry?

axpayers must consider many items in making the decision regarding the initial tax form of a business. The corporate​ (either C or S​ corporation) form offers the advantage of limited liability​, which is important for a new business. S corporations often are an attractive form for a new business because the losses in the initial years pass through to the shareholder and the losses offset any income that Celia would earn from other sources. ​Then, in profitable​ years, the shareholder may be eligible for the qualified business income deduction. The S corporation status can be terminated fairly easily if in the future the C corporation status becomes more desirable. The noncorporate entity form known as a limited liability company​ (LLC) also should be investigated. A limited liability company​ (LLC) form provides the limited liability benefits associated with a​ corporation, and it provides the tax benefits associated with a partnership. Under the check-the-box regulations​, an LLC also can elect to be taxed as either a C corporation or an S corporation even if not organized as a corporation under federal or state law. An LLC probably would not want to elect to be treated as an S corporation​ because, in most​ instances, it already is treated as a partnership without electing​ check-the-box regulations.

Krause Corporation makes an S​ election, believing that it has no current or accumulated​ E&P. However, after an IRS​ audit, Krause is found to have failed the passive investment income test for three consecutive years and also to have a Subchapter C​ E&P balance from its three pre−election tax years. The IRS will A. treat the error as such and allow the election to continue unbroken. B. retroactively revoke the election to the first day on which it was effective and Krause will not be able to reelect. C. likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C​ E&P. D. automatically terminate the election and Krause cannot reelect for a 5−year time period.

likely treat the termination as inadvertent and will probably approve a continued S election if the corporation distributes the Subchapter C​ E&P.

Alligood Corporation has two classes of common stock outstanding. The Class A and Class B common stock give the shareholders identical rights and interests in the profits and assets of the corporation. Class A stock has one vote per share. Class B stock is nonvoting. Alligood Corporation may A. make the S election once the Class B is retired. B. make the S election at any time. C. not make the S election due to two classes of stock. D. not make the S election due to different voting rights.

make the S election at any time.

If an S corporation inadvertently terminates its​ election, the IRS A. may permit the corporation to report as an S corporation even for the period that includes the termination date. B. will permit restoration of the S election only if the event causing the termination was not within the control of the corporation. C. will permit restoration of the S election if a majority of the shareholders consent to the reinstatement. D. will not permit the corporation to restore its S election until the completion of a five−year waiting period.

may permit the corporation to report as an S corporation even for the period that includes the termination date.

Shanghai Corporation was organized and elected S status in the current year. How much passive investment income can Shanghai earn and retain its S​ status? A. none B. ​80% of gross receipts C. no limit D. ​50% of gross receipts

no limit