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Exam 17: S: Corporations

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Question 71

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Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2016, Parker's basis in his Johnson Corp. stock was $14,000. During 2016, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2017, 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 2016? b. What is Parker's stock and debt basis at the end of 2016? c. What is Parker's stock and debt basis at the end of 2017?

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Parts a and b: All $25,000 of the ordina...

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Question 72

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ABC Corp. elected to be taxed as an S Corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

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No.
Explanation: The excess passive inve...

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Question 73

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Clampett, Inc. has been an S corporation since its inception. On July 15, 2017, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2017, was $30,000. For 2017, 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 2017?

If Annie and Andy (each a 30% shareholder in an S corporation) file a revocation on February 10, 2016 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one) ?

S corporations offer the same legal protection to owners as C corporations.

During 2016, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2017. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2016 its inventory basis under the LIFO method was $80,000. If MVC had used the FIFO method of accounting for its inventory, it would had a $100,000 basis in its inventory. Finally, MVC's regular taxable income in 2016 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

Which of the following would not result in an S election termination?

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2016, Bryant sold his CB shares to Don. CB reported business income for 2016 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline \text { Period } & \text { Income } \\\hline \text { January } 1 \text { through September } 30 ( 273 \text { days) } & \$ 200,000 \\\hline \text { October } 1 \text { through December } 31 \text { ( } 92 \text { days) } & 530,000 \\\hline \text { January } 1 \text { through December } 31 & \$ 730,000 \\\hline\end{array}$ How much 2016 income is allocated to each shareholder if CB corp. uses the daily method of allocating income?

Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2016. On December 31, 2015, Neal Corp. reported earnings and profits of $150,000. Beginning in 2016, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date of the termination? $\begin{array} { | r | r | r | r | } \hline \text { Yea } & \begin{array} { r } \text { Gross Receipts (including)} \\\text { passive investment } \\\text { income) }\end{array} & \begin{array} { r } \text { Passive } \\\text { imvestment } \\\text { income }\end{array} & \begin{array} { r } \text { Corporate } \\\text { Eamings } \\\text { and Profits } \\\text { (end of year) }\end{array} \\\hline 2016 & \$ 400,000 & \$ 120,000 & \$ 140,000 \\\hline 2017 & \$ 300,000 & \$ 70,000 & \$ 100,000 \\\hline 2018 & \$ 500,000 & \$ 130,000 & \$ 70,000 \\\hline 2019 & \$ 400,000 & \$ 110,000 & \$ 40,000 \\\hline 2020 & \$ 600,000 & \$ 155,000 & \$ 1,000 \\\hline\end{array}$