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Exam 11: S Corporations

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Question 21

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To make an S election effective as of the beginning of the current year,an S corporation must file IRS Form 2553 within 3½ months after the beginning of the year.

A) True
B) False

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Question 22

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SEC Corporation has been operating as a C corporation since 2014.It elected to become an S corporation,effective January 1,2017.On December 31,2016,SEC reported a net unrealized built in gain of $60,000.In addition to other transactions in 2017,SEC sold inventory it owned at the beginning of 2017 (it did not sell any other assets it owned at the beginning of 2017).At the beginning of the year,the inventory it sold had a fair market value of $30,000 and a FIFO tax basis of $10,000.SEC sold the inventory for $35,000.If SEC had been a C corporation in 2017,its taxable income would have been $100,000.How much built-in gains tax must SEC pay in 2017?

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It must pay $7,000 ($20,000 × 35%)in bui...

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Question 23

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An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the Net Investment Income tax.

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

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 35%.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?

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

Jackson is the sole owner of JJJ corp.(an S corporation).At the beginning of 2017,Jackson's basis in his JJJ stock was $8,000.For 2017,JJJ reported a ($30,000)ordinary business loss (not a passive loss)and $4,000 of long-term capital gains.Assuming Jackson's tax basis and his at risk amount are the same,what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2017?

During 2017,MVC operated as a C corporation.However,it made an election to be taxed as an S corporation effective January 1,2018.MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory.At the end of 2017 its inventory basis under the LIFO method was $80,000.If MVC had used the FIFO method of accounting for its inventory,it would have had a $100,000 basis in its inventory.Finally,MVC's regular taxable income in 2017 was $5,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

Assume Joe Harry sells his 25% 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) ?

Vanessa is the sole shareholder of V Corporation.V Corporation was formerly a C corporation but is currently an S corporation.At the end of 2017,before considering distributions,V Corporation's accumulated adjustments account (AAA)balance was $35,000 and its accumulated E&P from its years as a C corporation was $10,000.On July 1,V Corporation distributed $60,000 to Vanessa.What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

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

Suppose at the beginning of 2017,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 a $5,000 suspended loss from the S corporation.In 2017,Jamaal contributed $8,000 to the S corporation,and the S corporation had ordinary income of $4,000.Assume that Jamaal owns 40% of the S corporation.What is Jamaal's stock and debt basis at the end of 2017?

Parker is a 100% shareholder of Johnson Corp.(an S corporation).At the beginning of 2017,Parker's basis in his Johnson Corp.stock was $14,000.During 2017,Parker loaned $20,000 to Johnson Corp.and Johnson Corp.reported a $25,000 ordinary business loss and no separately stated items.In 2018,Johnson Corp.reported $8,000 of ordinary business income. a.How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2017? b.What is Parker's stock and debt basis at the end of 2017? c.What is Parker's stock and debt basis at the end of 2018?

Like partnerships and C corporations,S corporations face the same restrictions on using the cash method of accounting.

ABC was formed as a calendar-year S corporation with Alan,Brenda and Conner as equal shareholders.On May 1,2017,ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares)to his solely owned C corporation Conner,Inc.ABC reported business income for 2017 as follows (assume that there are 365 days in the year): If ABC uses the specific identification method to allocate income,how much will it allocate to the S corporation short year and C corporation short year?

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.

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.

Clampett,Inc.converted to an S corporation on January 1,2017.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 1,2017?

Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?

Shea is a 100% owner of Mets Corporation (an S corporation).Mets is a calendar year taxpayer.On February 16,2017,Mets filed an election to terminate its S election.Assuming Mets does not specify an effective date for the termination,what is the effective date of the termination?