Exam 22: S Corporations

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30 year-end as an S corporation.

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

Tone Loc and 89 of his biggest fans formed an S corporation, 2hit, Inc., as the original ninety 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 2 close friends. For the S corporation shareholder limit rules, how many shareholders does 2hit, Inc. have?

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

AIRE was initially formed as an S corporation three years ago. AIRE has four equal shareholders Adam, Irene, Raymond, and Ethan. Raymond and Ethan would like to terminate the S election. However, Adam and Irene are opposed to the idea. Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

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

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. stock on January 1, 2019, was $45,000. For 2019, 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 2019?

An S corporation election may be voluntarily or involuntarily terminated.

Clampett, Inc. converted to an S corporation on January 1, 2018. 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 2019, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming the corporate tax rate is 21% and that Clampett, Inc. had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc. pay in 2019?

Which of the following is not a separately stated item for 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.

Jackson is the sole owner of JJJ corp. (an S corporation). At the end of 2018, Jackson's basis in his JJJ stock and his at risk amount was $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, 2018. If Jackson contributes $6,000 cash to JJJ on July 1, 2019 and $3,000 cash on January 5, 2020, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in her Cook, Inc. stock after formation?

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

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:

XYZ Corporation (an S corporation) is owned by Jane and Rebecca who are each 50% shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2018. 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 corp. stock at the end of the year?

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

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000. During 2018, 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% of the S corporation?

If Annie and Andy (each a 30% shareholder in a calendar year S corporation) file a revocation statement on February 10, 2018 to terminate their S corporation's S election, what is the effective date of the S corporation termination (assuming they do not specify one)?

An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the Net Investment Income tax.