Chapter 11: S Corps
List five disadvantages of making an S election. (Select all that apply.) A. A C corporation is treated as a separate tax entity from its shareholders, thereby permitting its first $50,000 of income to be taxed at a 15% marginal rate instead of the shareholder's marginal rate. B. 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. C. An S corporation is subject to the personal holding company tax or the accumulated earnings tax if they elect to have a year-end that is not a calendar year end. D. An S corporation is not restricted in the number of shareholders it can have and the capital structure it can use, except at least one shareholder must be an individual. Partnerships and C corporations are not so restricted. E. 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. F. The S corporation's earnings are taxed to the shareholders when they are distributed. This treatment means the S corporation might not distribute enough cash and then become subject to the accumulated earnings tax G. 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. H. Dividends received by the S corporation are not eligible for the dividends-received deduction, as is the case for a C corporation.
A, B, E, G, H
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? A. 111 B. 110 C. 254 D. 255
A. 111
Identify which of the following statements is true. A. An S corporation can have more than 100 shareholders, since families are treated as a single shareholder. B. A nonresident alien can be an S corporation shareholder. C. A partnership can be an S corporation shareholder. D. All of the above are false.
A. An S corporation can have more than 100 shareholders, since families are treated as a single shareholder.
What is an inadvertent termination? What actions must the S corporation and its shareholders take to correct an inadvertent termination? What is an inadvertent termination? A. 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). B. An inadvertent termination is one where only the IRS, corporation, and shareholders agree was unintentional (e.g., failing the passive investment income test the first year as a result of improperly computing the corporation's Subchapter C E&P). C. An inadvertent termination is one where the IRS deems it 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). D. An inadvertent termination is one where the IRS deems it unintentional (e.g., failing the passive investment income test for three consecutive years as a result of improperly computing the shareholders' taxes).
A. 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 actions can an S corporation shareholder take before year-end to increase the amount of the S corporation's losses he or she can deduct in the year they are incurred? A. Increase stock or debt basis. The shareholder can make additional capital contributions or make additional loans to the corporation by year-end. B. Increase stock basis or decrease debt basis. The shareholder can make additional capital contributions to the corporation up until the date the S corporation tax return is filed, excluding extensions. C. Only increase debt basis. The shareholder can make additional loans to the corporation by year-end. D. None of the above.
A. Increase stock or debt basis. The shareholder can make additional capital contributions or make additional loans to the corporation by year-end.
Which of the following items is not separately stated for an S corporation? A. Section 1245 income B. charitable contribution C. short-term capital gain D. dividend income
A. Section 1245 income
Mashburn Corporation is an S corporation that uses a fiscal year ending June 30 as its tax year. When is Mashburn Corporation's income tax return due? A. September 15 B. March 15 of the next year C. October 15 D. July 15
A. September 15
When is the S corporation's tax return due? What extensions are available for filing the return? A. The S corporation's tax return is due on the fifteenth day of the third month following the close of the tax year. The corporation can request an automatic six-month extension of time to file the return. B. The S corporation's tax return is due on the fifteenth day of the ninth month following the close of the tax year. The corporation cannot request an extension of time to file the return because S corporations are expected to be filed prior to shareholder's return due dates, which is exactly one month later. C. The S corporation's tax return is due on the fifteenth day of the third month following the close of the tax year. The corporation can only request a six-month extension of time to file the return if all of the shareholder's extend their tax returns as well, otherwise the extension is approved for one month only. D. The S corporation's tax return is due on the fifteenth day of the fourth month following the close of the tax year. The corporation can request an automatic six-month extension of time to file the return.
A. The S corporation's tax return is due on the fifteenth day of the third month following the close of the tax year. The corporation can request an automatic six-month extension of time to file the return.
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 not be an "ineligible" corporation. C. The corporation must have only one class of stock. D. The corporation must be a domestic corporation
A. The corporation must not have any foreign-sourced income.
The passive income test relating to an S corporation election is applied A. annually. B. monthly. C. quarterly. D. daily.
A. annually.
Which of the following conditions will not cause an S election to be terminated? A. failing to file a timely tax return B. selecting an improper tax year C. creating a second class of stock having a dividend preference D. exceeding the 100-shareholder limit
A. failing to file a timely tax return
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 not permit the corporation to restore its S election until the completion of a five-year waiting period. C. will permit restoration of the S election if a majority of the shareholders consent to the reinstatement. D. will permit restoration of the S election only if the event causing the termination was not within the control of the corporation.
A. may permit the corporation to report as an S corporation even for the period that includes the termination date.
An S corporation is permitted an automatic extension of time for filing its tax return. The automatic extension period is A. six months. B. two months. C. three months. D. one month.
A. six months
Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2008. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2008, but had $200,000 of ordinary income. In 2009, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2008? A. $100,000 B. $200,000 C. $50,000 D. $0
A. $100,000
An electing S corporation has a $30,000 ordinary loss for the non-leap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her one-half of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Sonya? A. $15,000 B. $10,000 C. $6,000 D. $25,000
A. $15,000
List five advantages of making an S election. (Select all that apply.) A. An S corporation's earnings that pass through to the individual shareholders are subject to the self-employment tax. B. 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. C. 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. D. 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. E. 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). F. Capital gains, dividends, and tax-exempt income are included in S corporation income when passed through to the shareholders. Such amounts become commingled with other corporate earnings and are taxed as ordinary income at the highest tax bracket when distributed by a C corporation. G. 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. H. An S corporation is only subject to the personal holding company tax and the accumulated earnings tax on a yearly basis if the S Corporation has more than 10 shareholders.
B, C, D, E, G
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 A. Items b, d, e, and f would be ineligible shareholders in an S corporation. B. Items b, c and f would be ineligible shareholders in an S corporation. C. All items would be ineligible shareholders in an S corporation. D. Items d, e and f would be ineligible shareholders in an S corporation.
B. Items b, c and f would be ineligible shareholders in an S corporation.
An S corporation is permitted to claim A. a personal exemption. B. a deduction based on the amortization of organizational expenditures. C. a net operating loss. D. the dividends-received deduction.
B. a deduction based on the amortization of organizational expenditures.
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. 50% of gross receipts B. no limit C. 80% of gross receipts D. none
B. no limit
Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2009. Tex and Shirley each own 50% of the stock and have a basis in their stock of $50,000 on January 1, 2009. Cactus does not make any distributions during 2009, but had $200,000 of ordinary income. In 2010, ordinary income was $100,000 and distributions were $100,000. What is Tex's basis at January 1, 2011? A. $250,000 B. $150,000 C. $200,000 D. $100,000
B. $150,000
Cactus Corporation, an S Corporation, had accumulated earnings and profits of $100,000 at the beginning of 2011. Tex and Shirley each own 50% of the stock. Cactus does not make any distributions during 2011, but had $200,000 of ordinary income. In 2012, ordinary income was $100,000 and distributions were $100,000. What is Tex's ordinary income for 2012? A. $200,000 B. $50,000 C. $0 D. $100,000
B. $50,000
An electing S corporation has a $30,000 ordinary loss for the nonleap year. On January 1, Beverly and Sonya own equally all of the S corporation stock. On the 146th day of the year, Beverly gives her one-half of the S corporation stock to her daughter Becky. How much of the $30,000 ordinary loss is allocated to Beverly? A. $25,000 B. $6,000 C. $5,959 D. $15,000
B. $6,000
April Corporation's Subchapter S election was voluntarily terminated for 2010. The first year that April would be eligible to reelect S corporation status is A. 2012. B. 2014. C. 2015. D. 2013.
C. 2015.
Identify which of the following statements is true. A. Fringe benefits limited by the more-than-2%-shareholder rule include stock options, group term life insurance premiums, and medical insurance premiums. B. Section 318 stock attribution rules are used to define 2% or more shareholders of S corporation's stock. C. A shareholder owning 2% or more of an S corporation's stock, who is also an employee of the corporation, must include all statutory fringe benefits in gross income on his/her individual return. D. All of the above are false.
C. A shareholder owning 2% or more of an S corporation's stock, who is also an employee of the corporation, must include all statutory fringe benefits in gross income on his/her individual return.
Identify which of the following statements is false. A. An S corporation's ordinary income or loss is reported by an individual shareholder on Schedule E of Form 1040. B. An S corporation that owes the built-in gains tax or the excess net passive income tax must make quarterly estimated tax payments. C. An S corporation files a Form 1120S corporate income tax return on or before the 15th day of the fourth month following the close of its tax year. D. An S corporation cannot use the prior-year tax liability exception when determining the required payment to be made with respect to the built-in gains tax.
C. An S corporation files a Form 1120S corporate income tax return on or before the 15th day of the fourth month following the close of its tax year.
What actions must the S corporation and its shareholders take to correct an inadvertent termination? A. Once such a determination is made, the S corporation and its shareholders must restore its small business corporation status within 30 days after discovering the event causing the termination by ensuring each shareholder has a positive basis balance and all dividend payments have been made. B. Once such a determination is made, the shareholders must take the necessary steps, within two years after discovering the event causing the termination, to restore its small business corporation status by having the shareholders contribute money or property to the corporation equal to what caused the inadvertent termination. C. 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. D. Once such a determination is made, the S corporation must file a form with the IRS to restore its small business corporation status, and all of the shareholders must sign the form.
C. 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.
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. S corporations must adopt a calendar year or a 52-53 week year as its tax year. They cannot adopt a fiscal year. 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. 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.
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 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. B. 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. C. 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. D. 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.
C. 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.
Which of the following tax levies imposed on an S corporation are required to be paid by using estimated tax payments? A. excess net passive income tax B. built-in gains tax C. both A and B D. none of the above
C. both A and B
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 interest income earned in the current year on bonds purchased on January 1 of 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 accounts receivable in the current year that resulted from services performed last year D. None of the above are built-in gains.
C. collection of accounts receivable in the current year that resulted from services performed last year
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.
D. All of the above are false.
Identify which of the following statements is true. A. 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. B. An S corporation generally will not owe the built-in gains tax if the corporation has never been a C corporation. 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.
D. All of the above are true.
identify which of the following statements is true. A. 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. 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. 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. D. All of the above are true.
D. All of the above are true.
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. 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. 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. 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 partnershi
D. 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.
Which of the following corporate tax levies are imposed on an S corporation? A. corporate alternative minimum tax B. accumulated earnings tax C. corporate income tax D. None of these taxes are imposed on an S corporation.
D. None of these taxes are imposed on an S corporation.
A corporation must make an S election for the current year after March 15 in the case of a calendar-year corporation. True False
False
All shareholders must consent to the revocation of S status. True False
False
Corporations and partnerships can be S corporation shareholders. True False
False
Tax-exempt interest earned by an S corporation is not reported to its shareholders because it is excluded from the shareholders' gross income. True False
False
S shareholders are allocated shares of income, gain, loss, deduction, and credit based on their number of shares of stock and period of time for which the stock is held. True False
True
S shareholders cannot increase the basis of their stock by a ratable share of the general S corporation liabilities. True False
True
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. True False
True
The election of Subchapter S status by a corporation is valid only if all shareholders consent to the election. True False
True
