Exam 11: S Corporations

Maria resides in San Antonio, Texas. She formed MZE Corporation under the state laws of Texas. Maria anticipates that she will conduct her business activities in both Mexico and the United States. Is MZE eligible to elect S corporation status? Explain.

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?

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.

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

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions to the shareholder is governed by rules very similar to the rules for partnerships.

During 2019, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2020. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2019 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 2019 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2019, XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares) to his solely owned C corporation, Zach, Inc. Absent permission from the IRS, what is the earliest date XYZ may again elect to be taxed as an S corporation?

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?

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?

Built-in gains recognized 15 years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

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

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?

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

XYZ Corporation (an S corporation) is owned by Jane and Rebecca, who are each 50 percent shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2019. Required: a. What amount of ordinary business income is allocated to Jane? b. What is the amount and character of separately stated items allocated to Jane? c. What is Jane's basis in her XYZ Corporation stock at the end of the year?

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?

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

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

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?

Suppose SPA Corp. was formed by Sara Inc. (a C corporation that is 100 percent owned by Sara) and Sara's friend Tyson. In exchange for 50 percent of the stock of SPA, Sara contributed $100,000. In exchange for the remaining 50 percent of the SPA stock, Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000. How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?

S corporations are required to file Form 1120S, U.S. Income Tax Return for an S Corporation, with the IRS by the 15th day of the fourth month after the S corporation's year-end.