Chapter 22 - S Corporations

True or False: An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

False

True or False: S corporations are required to recognize both gains and losses on nonliquidating distributions of property to shareholders.

False

True or False: S corporations have considerable flexibility in making special profit and loss allocations of operating income.

False

True or False: Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

False

True or False: Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

False

True or False: The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

False

True or False: Unlike in partnerships, adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

False

True or False: SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc., will continue to use a June 30 year-end as an S corporation.

False S corporations are generally required to adopt a calendar year end.

True or False: S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

False S corporations may have no more than 100 shareholders; family members and their estates count as one.

True or False: An S election is terminated if the S corporation has passive investment income in excess of 20 percent of gross receipts for three consecutive years.

False The amount is 25 percent of gross receipts for three consecutive years.

True or False: After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.

False The corporation must wait until the beginning of the fifth year to elect S corporation status again.

True or False: The same exact requirements for forming and contributing property govern S corporations and partnerships.

False The same rules for forming and contributing property govern S and C corporations.

True or False: An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

False The shareholders must hold more than 50 percent of the stock to make a voluntary revocation.

True or False: C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.

False The tax applies to C corporations that used the LIFO method.

True or False: An S corporation can use a noncalendar year-end if it can establish a business purpose for an alternative year-end.

True

True or False: An S corporation election may be voluntarily or involuntarily terminated.

True

True or False: An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.

True

True or False: As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

True

True or False: Bobby T (75 percent owner) would like to terminate the S corporation status of DJ, Inc., but Dallas (5 percent owner) does not want to terminate S corporation status. Bobby T can terminate the S corporation status for DJ, Inc., without Dallas's consent.

True

True or False: Differences in voting powers are permissible across shares of S corporation stock as long as the shares have identical distribution and liquidation rights.

True

True or False: Distributions to owners may not cause the AAA to go negative or to become more negative.

True

True or False: For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is governed by rules very similar to the rules for partnerships.

True

True or False: If an S corporation never operated as a C corporation, it may earn passive investment income without fear of an involuntary S election termination.

True

True or False: If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

True

True or False: In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

True

True or False: Like partnerships, S corporations generally determine their accounting periods and make accounting method elections at the entity level.

True

True or False: Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

True

True or False: S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

True

True or False: S corporations are not entitled to a dividends received deduction.

True

True or False: S corporations generally recognize gain or loss on each appreciated and depreciated asset they distribute in liquidation.

True

True or False: S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

True

True or False: The built-in gains tax does not apply to S corporations that never operated as C corporations.

True

True or False: The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

True

True or False: When an S corporation distributes appreciated property to all of its shareholders pro rata, the shareholders who receive the distributed property recognize income on their distributive share of the deemed gain.

True

True or False: When an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

True

True or False: Corporations taxed as S corporations offer the same legal protection to owners as corporations taxed as C corporations.

True

True or False: Bobby T (95 percent owner) would like to elect S corporation status for DJ, Inc., but Dallas (5 percent owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc., without Dallas's consent.

True All shareholders on the date of the election must consent to the election.

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. What is Jamaal's stock and debt basis at the end of 2019? a. $0 stock basis; $4,600 debt basis. b. $0 stock basis; $9,600 debt basis. c. $4,600 stock basis; $0 debt basis. d. $9,600 stock basis; $0 debt basis. e. None of the choices are correct.

a. $0 stock basis; $4,600 debt basis. By rule, any net increase in basis for the year first restores the shareholder's debt basis (up to the outstanding debt amount) and then the shareholder's stock basis. Jamaal's debt basis is calculated as: $0 beginning-of-year basis + $8,000 contribution + $1,600 ($4,000 × 40%) share of S corporation income − $5,000 suspended loss = $4,600 at the end of 2019. Jamaal's stock basis remains at zero at the end of 2019 because his debt basis has not been restored to its outstanding debt amount, $10,000.

Assume that Clampett, Inc., has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc., never operated as a C corporation and that the corporate tax rate is 21 percent. What is Clampett, Inc.'s excess net passive income tax? a. $0. b. $21,000. c. $75,000. d. $100,000. e. None of the choices are correct.

a. $0. Clampett, Inc., is not subject to the excess net passive income tax because it never operated as a C corporation.

Assume that at the end of 2019, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Inc., stock. What is J.D.'s stock basis after the distribution? a. $45,000. b. $50,000. c. $85,000. d. $90,000. e. None of the choices are correct.

a. $45,000. Original basis of $50,000 + $35,000 distributive share of the gain on the distribution − $40,000 distribution = $45,000.

Assume Joe Harry sells his 25 percent interest in Joe's S Corp., Inc., to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp., Inc., earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)? a. $50,000. b. $200,000. c. $28,000. d. $112,000. e. None of the choices are correct.

a. $50,000. 200,000 * .25 = 50,000

Which of the following is the correct order in which loss limitation rules are applied? a. Basis rules first, at-risk rules second, passive loss rules third. b. Passive loss rules first, at-risk rules second, basis rules third. c. Basis rules first, passive loss rules second, at-risk rules third. d. Passive loss rules first, basis rules second, at-risk rules third. e. None of the choices are correct.

a. Basis rules first, at-risk rules second, passive loss rules third.

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on February 10, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)? a. January 1, 2019. b. February 10, 2019. c. January 1, 2020. d. February 10, 2020. e. None of the choices are correct.

a. January 1, 2019. Because more than 50 percent of the shareholders make a valid S termination election before two and a half months of the current year have passed, the election is valid as of the beginning of the year.

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2019, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions? a. $0 stock basis; $8,000 debt basis. b. $0 stock basis; $10,000 debt basis. c. $5,000 stock basis; $10,000 debt basis. d. $5,000 stock basis; $3,000 debt basis. e. None of the choices are correct.

b. $0 stock basis; $10,000 debt basis. $1,000 (original stock basis) + $4,000 ordinary income − $7,000 distribution = $0 stock basis and a $2,000 distribution in excess of stock basis generating $2,000 of capital gain. Debt basis is not reduced by distributions.

Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). What is Clampett, Inc.'s built-in gain or loss on January 1, 2019? a. $30,000 net built-in gain. b. $10,000 net built-in gain. c. $0 net built-in gain. d. $20,000 net built-in loss. e. None of the choices are correct.

b. $10,000 net built-in gain. $30,000 built-gain from inventory less $20,000 built-in loss from equipment.

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc., earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain? a. $0. b. $15,000. c. $27,500. d. $40,000. e. None of the choices are correct.

b. $15,000. Of the $200,000 distributed to shareholders, the first $150,000 is distributed from the AAA and the remaining $50,000 is distributed from prior C corporation earnings and profits. As a 25 percent shareholder, J.D.'s share of the distribution out of AAA is $37,500 ($150,000 × 25%). This distribution is nontaxable to the extent of J.D.'s basis ($10,000 + $12,500 distributive share of ordinary income [$50,000 × 25%]), and the excess is taxable as capital gain. Thus, J.D. has $37,500 − $22,500 = $15,000 of capital gain on the distribution.

Assume that Clampett, Inc., has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. What is Clampett, Inc.'s excess net passive income? a. $0. b. $25,000. c. $75,000. d. $100,000. e. None of the choices are correct.

b. $25,000. $25,000 = $100,000 net passive investment income × [(($100,000 passive investment income) − 25% × gross receipts (25% × ($200,000 sales + $100,000 passive income)))/$100,000 passive investment income].

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Inc., stock after formation? a. $20,000. b. $30,000. c. $60,000. d. $80,000. e. $120,000.

b. $30,000. $20,000 cash + $40,000 land − $30,000 mortgage = $30,000.

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc., earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $30,000, and his share of the distribution was $50,000. What is J.D.'s basis in the Clampett, Inc., stock after these transactions? a. $0. b. $5,000. c. $12,500. d. $15,000. e. None of the choices are correct.

b. $5,000. (Original basis of $30,000 + $12,500 share of ordinary income [$50,000 × 25%] − $37,500 distribution from the AAA [$150,000 × 25%]).

Assume that Clampett, Inc., has $200,000 of sales, $150,000 of cost of goods sold, $60,000 of interest income, and $40,000 of dividends. Assume that Clampett, Inc., has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 21 percent. Clampett, Inc.'s taxable income would have been $122,000 this year if it had been a C corporation. What is Clampett, Inc.'s excess net passive income tax? a. $0. b. $5,250. c. $26,250. d. $21,000. e. None of the choices are correct.

b. $5,250. $5,250 = 21% × 25,000 (where $25,000 is the excess net passive income, calculated as $25,000 = $100,000 net passive investment income × [(($100,000 passive investment income) − 25% × gross receipts (25% × ($200,000 sales + $100,000 passive income)))/$100,000 passive investment income]).

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original 90 shareholders. Tone then transferred some of his stock to his grandfather, four of Tone's cousins, five of Tone's children, three of Tone's grandchildren, and two close friends. According to the S corporation shareholder limit rules, how many shareholders does 2hit, Inc., have? a. 90 b. 92 c. 95 d. 97 e. None of the choices are correct.

b. 92 Family members include a common ancestor and his or her lineal descendants and their spouses. Therefore, Tone Loc, 89 fans, and his two close friends will be deemed to be the total number of shareholders for 2hit, Inc.

Which of the following is a requirement to be an S corporation? a. be a domestic or foreign corporation. b. have only one class of stock. c. have fewer than 75 shareholders. d. have at least one corporate shareholder. e. none of the choices are correct.

b. have only one class of stock.

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc., earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend? a. $0. b. $10,000. c. $12,500. d. $15,000. e. None of the choices are correct.

c. $12,500. Of the $200,000 distributed to shareholders, the first $150,000 is distributed from the AAA and the remaining $50,000 is distributed from prior C corporation earnings and profits. As a 25 percent shareholder, J.D.'s share of the dividend out of earnings and profits is $12,500 ($50,000 × 25%).

Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent. Clampett, Inc.'s taxable income in 2020 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc., pay in 2020? a. $10,500. b. $10,000. c. $2,100. d. $0. e. None of the choices are correct.

c. $2,100. The net built-in gain is limited to the net built-in gain at conversion ($10,000). Thus, the tax paid is $10,000 × 21% = $2,100.

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc., in 2020? a. $60,000. b. $50,000. c. $20,000. d. $10,000. e. None of the choices are correct.

c. $20,000. $10,000 share of ordinary income + $10,000 capital gain from distribution in excess of basis ($50,000 distribution − $30,000 basis − $10,000 increase in basis from distributive share of ordinary income).

Assume that at the end of 2019, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Inc., stock. How much income does J.D. recognize as a result of the distribution? a. $0. b. $15,000. c. $25,000. d. $40,000. e. None of the choices are correct.

c. $25,000. $15,000 distributive share of the gain on the distribution ($40,000 − $25,000) plus $10,000 due to the $40,000 distribution exceeding J.D.'s $30,000 basis ($15,000 original basis + $15,000 increase in basis from gain from property distribution).

Assume that at the end of 2019, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Inc., stock. How much income does J.D. recognize as a result of the distribution? a. $0. b. $5,000. c. $35,000. d. $40,000. e. None of the choices are correct.

c. $35,000. $35,000 distributive share of the gain on the distribution ($40,000 − $5,000).

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50 percent of the S corporation? a. $10,000. b. $27,000. c. $37,000. d. $40,000. e. None of the choices are correct.

c. $37,000. Losses are limited to stock basis ($27,000) plus debt basis ($10,000).

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $1,000 and he has a $10,000 debt basis associated with a $10,000 loan he made to the S corporation. In 2019, Jamaal's share of S corporation income is $4,000, and he received a $7,000 distribution from the S corporation. How much income does Jamaal report in 2019 from these transactions? a. $0. b. $4,000. c. $6,000. d. $7,000. e. None of the choices are correct.

c. $6,000. $4,000 ordinary income plus a capital gain of $2,000 for the distribution in excess of stock basis ($7,000 distribution − $5,000 stock basis ($1,000 original basis + $4,000 increase in basis from operating income)).

Which of the following is prohibited from being an S corporation shareholder? a. Foreign citizens that are U.S. residents. b. U.S. citizens. c. C corporations. d. 51 unrelated individuals. e. None of the choices are correct.

c. C corporations.

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation) file a revocation statement on March 20, 2019, to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)? a. January 1, 2019. b. March 18, 2019. c. January 1, 2020. d. March 16, 2020. e. None of the choices are correct.

c. January 1, 2020. Because more than 50 percent of the shareholders make a valid S termination election after two and a half months of the current year have passed, the election is valid as of the beginning of the next year.

Which of the following statements is correct? a. The LIFO recapture tax precludes an S corporation from using the LIFO method. b. The LIFO recapture tax is paid in five annual installments. c. The LIFO recapture amount increases the corporation's adjusted basis in its inventory. d. The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years. e. None of the choices are correct.

c. The LIFO recapture amount increases the corporation's adjusted basis in its inventory.

Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett, Inc., had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc., pay in 2020? a. $10,500. b. $10,000. c. $2,100. d. $0. e. None of the choices are correct.

d. $0. The net built-in gain is limited to the net built-in gain at conversion ($10,000) and may be reduced by any net operating losses carried over from prior C corporation years ($20,000). Thus, Clampett, Inc., has no built-in gains tax liability.

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Inc., in 2020? a. $60,000. b. $50,000. c. $20,000. d. $10,000. e. None of the choices are correct.

d. $10,000. $10,000 from distribution in excess of basis ($50,000 distribution − $30,000 basis − $10,000 increase in basis from distributive share of ordinary income).

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc., in 2020? a. $60,000. b. $50,000. c. $20,000. d. $10,000. e. None of the choices are correct.

d. $10,000. $10,000 share of ordinary income. The distribution is not taxable because J.D.'s basis is $55,000 prior to the distribution ($45,000 original basis + $10,000 increase in basis from distributive share of ordinary income).

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation, and he has a $5,000 suspended loss from the S corporation. In 2019, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40 percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation? a. $4,000 income. b. $1,600 income. c. $1,000 loss. d. $3,400 loss. e. None of the choices are correct.

d. $3,400 loss. $1,600 ordinary income ($4,000 × 40%) − $5,000 suspended loss = $3,400 loss. Jamaal may deduct the $5,000 loss carryover against his debt basis, which was increased by his $8,000 contribution and his $1,600 share of S corporation income.

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc., earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much income does J.D. recognize this year from these transactions? a. $0. b. $10,000. c. $17,500. d. $40,000. e. None of the choices are correct.

d. $40,000. $12,500 (share of ordinary income: $50,000 × 25%) + $15,000 ($37,500 AAA distribution in excess of predistribution stock basis of $22,500) + $12,500 (distribution treated as dividend: $50,000 × 25%) = $40,000.

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. What is J.D.'s basis in his Clampett, Inc., stock after all transactions in 2020? a. $40,000. b. $30,000. c. $20,000. d. $5,000. e. None of the choices are correct.

d. $5,000. J.D.'s basis is $5,000 ($45,000 original basis + $10,000 increase in basis from his distributive share of income − $50,000 distribution).

Which of the following would not result in an S election termination? a. Having 120 unrelated shareholders. b. Having a C corporation as a shareholder. c. Issuing a second class of stock. d. Having excess passive investment income for two consecutive years. e. None of the choices are correct.

d. Having excess passive investment income for two consecutive years. Excess passive investment income for three years terminates an S election.

Which of the following is not an adjustment to an S corporation shareholder's stock basis? a. Increase for any contributions to the S corporation during the year. b. Increase for shareholder's share of ordinary business income. c. Decrease for shareholder's share of nondeductible items. d. Increase for distributions during the year. e. None of the choices are correct.

d. Increase for distributions during the year. Distributions decrease basis.

Clampett, Inc. (an S corporation) previously operated as a C corporation. Under general rules, distributions from Clampett, Inc., are deemed to be paid in the following order: a. Shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account. b. Shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit. c. Prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis. d. The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis. e. None of the choices are correct.

d. The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis.

Which of the following is not a separately stated item for S corporations? a. Dividends. b. Interest income. c. Charitable contributions. d. Investment interest expense. e. All of the choices are separately stated items.

e. All of the choices are separately stated items.

Suppose a calendar-year C corporation, NewCorp., Inc., was formed on January 1, 2019, and all of the shareholders (Hassell, Richie Cunningham, and Arnold's, Inc., a C corporation) filed a Form 2553 to elect S corporation status on April 14, 2019. When is the S election effective? a. January 1, 2019. b. April 14, 2019. c. January 1, 2020. d. April 14, 2020. e. Never.

e. Never. The election is not valid because S corporations cannot have corporations as shareholders (Arnold's, Inc.).

Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000), inventory (FMV $60,000, basis $30,000), accounts receivable (FMV $40,000, basis $40,000), and equipment (FMV $60,000, basis $80,000). In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2020 if it had been a C corporation. In 2021, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc., pay in 2020? In 2021? a. $10,500 in 2020; $0 in 2021. b. $2,100 in 2020; $0 in 2021. c. $0 in 2020; $0 in 2021. d. $0 in 2020; $10,500 in 2021. e. None of the choices are correct.

e. None of the choices are correct. $0 in 2020 (because the net built-in gains are limited to the corporation's taxable income using C corporation tax rules); $2,100 in 2021 (because the built-in gains limited in 2020 are treated as built-in gains in the next tax year; the net built-in gains of $10,000 × 21% corporate tax rate results in $2,100 of tax).

Suppose that at the beginning of 2019 Jamaal's basis in his S corporation stock was $27,000 and Jamaal has directly loaned the S corporation $10,000. During 2019, the S corporation reported an $80,000 ordinary business loss and no separately stated items. After any loss deductions this year, what is Jamaal's stock and debt basis at the end of the year if Jamaal is a 50 percent shareholder of the S corporation? a. $27,000 stock basis; $10,000 debt basis. b. $0 stock basis; $10,000 debt basis. c. $67,000 stock basis; $10,000 debt basis. d. ($13,000) stock basis; $10,000 debt basis. e. None of the choices are correct.

e. None of the choices are correct. $0 stock basis; $0 debt basis; the $40,000 loss first offsets stock basis and then debt basis. However, the loss may not cause either the stock basis or the debt basis to drop below zero.

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $45,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Inc., in 2020? a. $60,000. b. $50,000. c. $20,000. d. $10,000. e. None of the choices are correct.

e. None of the choices are correct. $0. The distribution is not taxable because J.D.'s basis is $55,000 prior to the distribution ($45,000 original basis + $10,000 increase in basis from distributive share of ordinary income). Thus, J.D. has no capital gain.

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, J.D. was allocated $10,000 of ordinary income from Clampett, Inc., and no separately stated items. What is J.D.'s basis in his Clampett, Inc., stock after all transactions in 2020? a. $40,000. b. $30,000. c. $20,000. d. ($10,000). e. None of the choices are correct.

e. None of the choices are correct. J.D.'s basis is $0 because the $50,000 distribution exceeds his basis of $40,000 prior to the distribution ($30,000 original basis + $10,000 increase in basis from his distributive share of income) and distributions cannot cause stock basis to drop below zero.

Which of the following S corporations would be subject to the excess net passive income tax? a. An S corporation that never operated as a C corporation. b. An S corporation that has previously distributed all earnings and profits from prior C corporation years. c. An S corporation with no earnings and profits from prior C corporation years and with passive investment income that exceeds 30 percent of its gross receipts. d. An S corporation with $2,000 of earnings and profits from prior C corporation years and with passive investment income that equals 22 percent of its gross receipts. e. None of the choices are correct.

e. None of the choices are correct. To be subject to the excess net passive income tax, the S corporation must have earnings and profits from prior C corporation years and have passive investment income that exceeds 25 percent of its gross receipts.