Exam 11: S Corporations

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

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?

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

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?

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?

Jackson is the sole owner of JJJ Corp. (an S corporation). At the beginning of 2019, Jackson's basis in his JJJ stock was $8,000. For 2019, 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 2019?

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

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

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

Maria, a resident of Mexico City, Mexico, formed MZE Corp. in Mexico under Mexican law but planned to do business in the United States. Is MZE eligible to elect S corporation status in the United States? Explain.

CB Corporation was formed as a calendar-year S corporation. Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder. On September 30, 2019, Bryant sold his CB shares to Don. CB reported business income for 2019 as follows: (Assume that there are 365 days in the year.) How much 2019 income is allocated to each shareholder if CB Corporation uses the daily method of allocating 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 $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?

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?

S corporation losses allocated to a shareholder that are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization.

Hector formed H Corporation as a C corporation at the beginning of 2019. Hector was the sole shareholder of H Corporation. H Corporation reported 2019 taxable income (and earnings and profits) of $200,000. At the beginning of 2020, H Corporation elected S corporation status. During 2020, H Corporation had a rough year, reporting an ordinary business loss of $70,000, $4,000 of dividend income, and $3,000 of interest income. H Corporation also distributed $15,000 to Hector. What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA) at the end of 2020?

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?

Which of the following is not a separately stated item for S corporations?

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?

Publicly traded corporations cannot be treated as S corporations.

Lamont is a 100 percent owner of JKL Corporation. JKL has been an S corporation since its inception in 2019. During 2020, JKL distributed $20,000 to Lamont. During 2020, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain on the distribution, if any, that Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2020 in each of the following scenarios? a. Lamont's stock basis at the beginning of 2020 was $30,000. b. Lamont's stock basis at the beginning of 2020 was $4,000.