Exam 22: S Corporations

Like partnerships,S corporations generally determine their accounting periods and make accounting method elections at the entity level.

Which of the following is the correct order in which loss limitation rules are applied?

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture 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,Harold,Missy,and Ranae formed HMR Corporation as an S corporation.For one-third of the HMR stock,Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000.The land was subject to a $45,000 mortgage,which was assumed by HMR on the formation.Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock.What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?

On March 15,2019,J.D.sold his Clampett,Inc.(an S corporation)shares to Ellie Mae,Inc.(a C corporation),terminating Clampett,Inc.'s S election on March 15,2019.Absent permission from the IRS,what is the earliest date Clampett,Inc.,may again elect to be taxed as an S corporation?

For S corporations without earnings and profits from prior C corporation years,the taxation of cash distributions to the shareholder is governed by rules very similar to the rules for partnerships.

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?

Suppose a calendar-year C corporation,NewCorp.,Inc.,was formed on January 1,2019,and all of the shareholders (Hassell,Richie Cunningham,and Arnold's,Inc.,a C corporation)filed a Form 2553 to elect S corporation status on April 14,2019.When is the S election effective?

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?

Regarding debt,S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

Clampett,Inc.(an S corporation)previously operated as a C corporation.Under general rules,distributions from Clampett,Inc.,are deemed to be paid in the following order:

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?

An S corporation shareholder's allocable share of ordinary business income (loss)is classified as self-employment income for tax purposes.

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

Unlike in partnerships,adjustments that decrease an S corporation shareholder's basis may reduce it below zero.

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

If Annie and Andy (each a 30 percent shareholder in a calendar-year S corporation)file a revocation statement on February 10,2019,to terminate their S corporation's S election,what is the effective date of the S corporation termination (assuming they do not specify one)?

Which of the following is not a true statement?

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?