Business Income Tax - (Questions) Chapter 17 - S Corporations

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

$0; $10,000 $30,000 is nontaxable because Karen has this much in basis

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) Land $89,000 (basis $72,000) What is Houser's net unrealized built-in gain at conversion?

$11,000 (Inventory has a $6,000 built-in loss and land has a $17,000 built-in gain which equals a net $11,000 unrealized built-in gain)

Old Sea Corp. was organized as a C corporation in 1983. Four years ago, Old Sea made a valid S corporation election when it had $35,000 of undistributed E&P. It has generated excess passive investment income of 26%, 22, and 28% for the last three years. Assuming Old sea is a calendar year-end corporation, as of what date will the S corporation status be terminated? At the start of the current year (Jan 1) At the start of the previous year (Jan 1) Never, based on this information

Never, based on this information Since the passive investment income has not been in excess of 25% for 3 consecutive years, the S corporation status is NOT terminated

Which of the following are required in order for the excess net passive income tax to apply? 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 The S corporation has a partnership as a shareholder

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 (The passive income tax may apply if the S corporation previously operated as a C corporation with accumulated E&P, and now generates excess passive income)

Papa received a distribution of land from his S corporation in a liquidating distribution. The land has a FMV 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 and? $67,000 $32,000

$67,000 Papa takes the FMV as his basis

Which of the following does NOT decrease a shareholder's basis in an S corporation? Distributions of property from the S corporation The shareholder's share of losses when basis is already zero Distributions of cash from the S corporation Shareholders share of business losses

The shareholder's share of losses when basis is already zero A shareholder's basis may never be reduced below zero

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 1/1 to 8/15 is 227 days. Thus under the daily method, the S corporation income is $120,000/365 days x 227 days = $74,630 Under the specific ID, the income is $75,000

The LIFO recapture tax

- 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 - is due in four annual installments, starting with the due date of the final C corporation return

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 As self-employment earnings subject to self-employment taxes As tax-free distributions from an S corporation

As salary to the extent of reasonable compensation for Rolando's services Since S corporation distributions are generally tax-free, Rolando's attempt to disguise his salary as a distribution avoids employment taxes. The IRS is likely to characterize a portion of the distribution as salary

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

C corporation S corporations are formed in a manner similar to a C corporation and enjoy the same tax free treatment under Section 351.

Match the following entities with the alternatives to choose a fiscal year

C corporation - Can choose any month end S corporation - Generally must choose a calendar year-end, but may choose a fiscal year end if a business purpose exists Partnership - Restricted to the least deferral based on owner's year-ends

Match the characteristic of an S corporation with the other entity it most closely resembles.

C corporation - legal status and liability protection Partnerships - treatment of income or loss as a flow-through

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%

Toastbusters Corp, a calendar year-end S corporation, generates 80% of its income from the sale of toasters. What tax accounting methods would be permitted for Toastbusters? Cash Hybrid Accrual

Hybrid and accrual Toastbusters could use the hybrid method to account for the inventory on an accrual basis and cash basis otherwise. The accrual method is always permitted.

Kileau Corp, a calendar tax year S corporation, terminated its S corporation status on September 22, 20X4 when it failed the shareholder requirement. What is the first date on which Kileau can re-elect S status? September 22, 20X9 January 1, 20X9 January 1, 20X8

January 1, 20X9 The first day of the fifth tax year after the termination is the earliest

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

July 1 of the current year The S election is terminated immediately when the S requirements are NOT met

Match the treatment of typical non-taxable fringe benefits with the type of S corporation shareholder

Less than or equal to 2% shareholder - same as corporations; deductible by the S corporation and non-taxable to the shareholder (Less than or equal to 2% shareholders are treated just like other corporate employees and the value of the benefits are is not taxable to the shareholder-employee) Greater than 2% shareholder - Deductible by the S corporation, but taxable to the shareholder (Greater than 2% shareholders are treated like partners and the value of the fringe benefit is taxable)

ESS Corporation is organized on January 1, 20X1 and is a calendar year-end corporation. It meets all the S corporation requirements and all shareholders consent to an S corporation election. In order to be treated as an S corporation in the current year, ESS must make the election by _______ 15th, 20X1

March (The 15th day of the third month)

The due date for a calendar year-end S corporation is: March 15th April 15th

March 15th

Chaos Corp, a calendar year S corporation, had the following shareholder transactions during the year. Max and Barbara (unrelated) owned 50% each through May 31. On May 31, Barbara sold one-half of her shares to Siegfried. On September 15, Barbara bought all of Max's shares then on October 31, Barbara bought all but 1% of the shares back from Siegfried (thus after October 31, Barbara owned 99% and Siegfried owned 1%). If Chaos wishes to allocate business income to the different periods based on the normal accounting rules, which shareholders must approve that decision?

Max, Barbara, and Siegfried All shareholders with changing ownership percentages must approve the use of normal accounting rules for allocation.

Which of the following are required in order to apply the built-in gains tax on an S corporation? There were net unrealized built-in gains at the time of conversion to an S corporation The S corporation must have converted into a C 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 (There must have been built-in gains at the time of the conversion from a C corporation to an S corporation) The S corporation was converted from a C corporation (The S corporation must have previously been treated as a C corporation for the built-in tax gains to apply) The S corporation must recognize net built-in gains during a fixed number of years (Built-in gains must generally be recognized during the first 5 years as an S corporation)

(True/False) S corporations are generally required to use a calendar year-end

True Unless the corporation can establish a business purpose for alternative year-end, S corporations must use a calendar year-end.

The tax rate used to calculate the built-in gains tax is the: highest current corporate tax rate ordinary rate applicable to the highest rate shareholder in the S corp 15% long-term capital gains rate

highest current corporate tax rate The highest (and only) rate is currently 21%

Which of the following may NOT be an S corporation shareholder tax-exempt religious organization qualified subchapter S trusts (QSSTs) limited partnership US tax resident

limited partnership

The net gain that an S corporation would recognize if it sold each asset at its FMV on the first day after converting from a C corporation to an S corporation is the maximum gain recognizable by the S corp on converted assets net unrealized built-in gain unrealized converted gain

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 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 fully deductible at the time of the termination not deductible

not deductible unless additional basis is created during the PTTP

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

separately stated items

Assuming the transfer meets the Section 351 requirements, an S corporation shareholder's initial (upon formation) basis in the S corp is equal to the: tax basis of the property transferred less any liabilities on the property assumed by the corporation fair market value of the property transferred plus liabilities assumed by the corporation tax basis of the property contributed plus any liabilities on the property assumed by the corporation

tax basis of the property transferred less any liabilities on the property assumed by the corporation S corporation shareholders take the substituted basis (the tax basis in the property prior to the transfer) less liabilities.

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 treat the distribution as if the basis of the property distributed recognize loss as if the property were sold for FMV at the distribution

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

The accumulated adjustment 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

(True/False) S corporation distributions are never taxable to shareholders

False Distributions are only nontaxable to the extent of the shareholder's basis in the stock

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. Daily method Specific ID method First-in First out method

First-in First out method (FIFO is an accounting method)