Exam 22: S Corporations

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

During 2018, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2019. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2018 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 2018 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

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). Assume the corporate tax rate is 21% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2019 if it had been a C corporation. In 2020, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2019? In 2020?

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

Publicly traded corporations cannot be treated as S corporations.

Distributions to owners may not cause the AAA to go negative or to become more negative.

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. 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% shareholder of the S corporation?

Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?

Suppose at the beginning of 2018, 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 2018, 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?

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2018, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation Conner, Inc. ABC reported business income for 2018 as follows (assume that there are 365 days in the year): If ABC uses the daily method of allocating income between the S corporation short tax year (January 1 - April 30) and the C corporation short tax year (May 1 − December 31), how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2018?

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

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

Assume that at the end of 2018, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Inc. has no corporate E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. What is J. D.'s stock basis after the distribution?

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.

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). What is Clampett, Inc.'s built-in gain or loss on January 1, 2018?

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

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

RGD Corporation was a C corporation from its inception in 2013 through 2017. However, it elected S corporation status effective January 1, 2018. RGD had $50,000 of earnings and profits at the end of 2017. RGD reported the following information for its 2018 tax year. What amount of excess net passive income tax is RGD liable for in 2018? Assume the corporate tax rate is 21%. (Round your answer for excess net passive income to the nearest thousand).

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?

An S corporation shareholder calculates his initial basis upon formation of the corporation like a C corporation shareholder.