Exam 22: S Corporations

In 2021, for an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1)tax-basis, (2)at-risk amount, and (3)tax shelter rules.

XYZ Corporation (an S corporation)is owned by Jane and Rebecca, who are each 50percent shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2020. 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?

Supposethat at the beginning of 2020 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 2020, 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?

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

During 2020, CDE Corporation (an S corporation since its inception in 2018)liquidates this year by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $118,000 and CDE's tax basis in the property was $126,400. Before considering the effects of the distribution, Clark's basis in his CDE stock was $58,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

At the beginning of the year, Clampett, Incorporated, had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Incorporated, earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25percent of Clampett, Incorporated, his basis in Clampett, Incorporated, 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?

Clampett, Incorporated, converted to an S corporation on January 1, 2020. At that time, Clampett, Incorporated, had cash ($56,000), inventory (FMV $76,000, basis $38,000), accounts receivable (FMV $56,000, basis $56,000), and equipment (FMV $76,000, basis $96,000). In 2021, Clampett, Incorporated, sells its entire inventory for $76,000 (basis $38,000). Assume the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income in 2021 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Incorporated, pay in 2021?

Assume that Clampett, Incorporated, 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, Incorporated, never operated as a C corporation and that the corporate tax rate is 21 percent. What is Clampett, Incorporated's excess net passive income tax?

Assume that Clampett, Incorporated, 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, Incorporated, has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 21 percent. Clampett, Incorporated's taxable income would have been $122,000 this year if it had been a C corporation. What is Clampett, Incorporated's excess net passive income tax?

During 2020, CDE Corporation (an S corporation since its inception in 2018)liquidates this year by distributing a parcel of land to its sole shareholder, Clark. The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $130,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of loss, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is his basis in the land?

Suppose Clampett, Incorporated, terminated its S election on August 28, 2020. 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 2021, J.D. made additional capital contributions of $5,000 on March 15 and $12,000 on September 5. How much loss may J.D. deduct in 2021?

Supposethat at the beginning of 2020 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, andhe has a $5,000 suspended loss from the S corporation. In 2020, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40percent of the S corporation. How much net income or loss does Jamaal report this year from the S corporation?

Assume Joe Harry sells his 25percent interest in Joe's S Corporation, to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corporation, earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days)?

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

CB Corporation was formed as a calendar-year S corporation. Casey is a 60percent shareholder and Bryant is a 40percent shareholder. On September 30, 2020, Bryant sold his CB shares to Don. CB reported business income for 2020 as follows: (Assume that there are 365 days in the year.) How much 2020 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

Parker is a 100percent shareholder of Johnson Corporation (an S corporation). At the beginning of 2020, Parker's basis in his Johnson Corporation stock was $14,000. During 2020, Parker loaned $20,000 to Johnson Corporation and Johnson Corporation reported a $25,000 ordinary business loss and no separately stated items. In 2021, Johnson corporation 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 2020? b. What is Parker's stock and debt basis at the end of 2020? c. What is Parker's stock and debt basis at the end of 2021?

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.

Lamont is a 100percent owner of JKL Corporation. JKL has been an S corporation since its inception in 2020. During 2021, JKL distributed $20,000 to Lamont. During 2021, 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 2021 in each of the following scenarios? a. Lamont's stock basis at the beginning of 2021 was $30,000. b. Lamont's stock basis at the beginning of 2021 was $4,000.

ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2020, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares)to his solely owned C corporation, Conner, Incorporated ABC reported business income for 2020 as follows: (Assume that there are 365 days in the year.) If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

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