Exam 17: S Corporations

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.

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.

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?

Which of the following is prohibited from being an S corporation shareholder?

Jackson is the sole owner of JJJ Corp.(an S corporation).At the end of 2019, Jackson's basis in his JJJ stock and his at-risk amount were $0.Jackson also had a $10,000 suspended ordinary business loss (suspended at the tax-basis and at-risk level).JJJ's S election was terminated effective the end of the day on December 31, 2019.If Jackson contributes $6,000 cash to JJJ on July 1, 2020, and $3,000 cash on January 5, 2021, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

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?

Parker is a 100 percent shareholder of Johnson Corp.(an S corporation).At the beginning of 2019, Parker's basis in his Johnson Corp.stock was $14,000.During 2019, Parker loaned $20,000 to Johnson Corp.and Johnson Corp.reported a $25,000 ordinary business loss and no separately stated items.In 2020, 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 2019? b.What is Parker's stock and debt basis at the end of 2019? c.What is Parker's stock and debt basis at the end of 2020?

Neal Corporation was initially formed as a C corporation with a calendar year-end.Neal elected S corporation status, effective January 1, 2019.On December 31, 2018, Neal Corp.reported earnings and profits of $150,000.Beginning in 2019, 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? Year 2019 2020 2021 2022 2023 Gross receipts (including passive investment income) \ 400,000 \ 300,000 \ 500,000 \ 400,000 \ 600,000 Passive investment income \ 120,000 \ 70,000 \ 130,000 \ 110,000 \1 55,000 Corporate earnings and profits (end of year) \ 140,000 \ 100,000 \ 70,000 \ 40,000 \ 1,000

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?

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

Which of the following statements is correct regarding S corporation estimated taxes?

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?

Suppose Clampett, Inc., terminated its S election on August 28, 2019.At the end of the S corporation's short tax year ending on August 28, J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis), and he had a suspended loss of $20,000.In 2020, J.D.made additional capital contributions of $5,000 on March 15 and $12,000 on September 20.How much loss may J.D.deduct in 2020?

Hazel is the sole shareholder of Maple Corp.In 2019 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits).In 2019, Maple elected S corporation status.During 2020 Maple reported $12,000 of ordinary business income and no separately stated items.It also distributed $25,000 to Hazel.What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2020 (after accounting for the distribution)if her basis at the beginning of the year was $5,000?

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

Which of the following is a requirement to be an S corporation?

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.

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.

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?

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