Question 1

Assume that at the end of 2020, Clampett, Incorporated (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

Accepted Answer

A)  $0 
B)  $15,000 
C)  $25,000 
D)  $40,000 
E)  None of the choices are correct.

Question 2

S corporations face the same restrictionsas partnerships and C corporations on using the cash method of accounting.

Accepted Answer

A) True 
 B)False

Question 3

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2021, Clampett, Incorporated, distributed $50,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2021, was $45,000. For 2021, J.D. was allocated $10,000 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2021?

Accepted Answer

A)  $60,000 
B)  $50,000 
C)  $20,000 
D)  $10,000 
E)  None of the choices are correct.

Question 4

Which of the following is not a true statement?

Accepted Answer

A)  For shareholder-employees who own 2 percent or less of the entity, the S corporation gets a tax deduction for qualifying fringe benefits, and the benefits are nontaxable to the employees. 
B)  For shareholder-employees who own more than 2 percent of the S corporation, the S corporation gets a tax deduction, but the otherwise qualifying fringe benefits are taxable to the shareholder-employees who own more than 2 percent. 
C)  S corporation ownerswho also work for the S corporation have a tax incentive to pay themselves a low salary. 
D)  An S corporation shareholder's allocable share of ordinary business income (loss) is not classified as self-employment income for tax purposes. 
E)  None of the choices are false.

Question 5

Assume that at the end of 2020, Clampett, Incorporated (an S corporation) distributes property (fair market value of $59,500, basis of $11,500) to each of its four equal shareholders (aggregate distribution of $238,000). At the time of the distribution, Clampett, Incorporated, has no corporate earnings and profits and J.D. has a basis of $52,600 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

Accepted Answer

A)  $0 
B)  $11,500 
C)  $48,000 
D)  $59,500 
E)  None of the choices are correct.

Question 6

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. What is Clampett, Incorporated's excess net passive income?

Accepted Answer

A)  $0 
B)  $25,000 
C)  $75,000 
D)  $100,000 
E)  None of the choices are correct.

Question 7

Jackson is the sole owner of JJJ Corporation (an S corporation). At the beginning of 2020, Jackson's basis in his JJJ stock was $8,300. For 2020, JJJ reported a ($30,300) ordinary business loss (not a passive loss) and $4,300 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 2020?

Accepted Answer

The answer of Jackson is the sole owner of JJJ...

Question 8

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

Accepted Answer

A) True 
 B)False

Question 9

XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2020, XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares) to his solely owned C corporation, Zach, Incorporated Absent permission from the IRS, what is the earliest date XYZ may again elect to be taxed as an S corporation?

Accepted Answer

The answer of XYZ was formed as a calendar-year S...

Question 10

Assume that at the end of 2020, Clampett, Incorporated (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, Incorporated, has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Incorporated, stock. How much total income does J.D. recognize as a result of the distribution?

Accepted Answer

A)  $0 
B)  $5,000 
C)  $35,000 
D)  $40,000 
E)  None of the choices are correct.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

ABC Corporation elected to be taxed as an S corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

Accepted Answer

The answer of ABC Corporation elected to be taxed as...

Question 13

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January 1 of 2020. The following assets were owned by MWC on December 31, 2019.
  What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2020?

Accepted Answer

The answer of MWC is a C corporation that uses...

Question 14

Hazel is the sole shareholder of Maple Corporation In 2020 Maple operated as a C corporation and reported $15,100 of taxable income (and earnings and profits). On January 1, 2021, Maple elected S corporation status. During 2021 Maple reported $12,100 of ordinary business income and no separately stated items. It also distributed $25,100 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2021 (after accounting for the distribution) if her basis at the beginning of the year was $5,100?

Accepted Answer

The answer of Hazel is the sole shareholder of Maple...

Question 15

RGD Corporation was a C corporation from its inception in 2016 through 2019. However, it elected S corporation status effective January 1, 2020. RGD had $50,000 of earnings and profits at the end of 2019. RGD reported the following information for its 2020 tax year.
  What amount of excess net passive income tax is RGD liable for in 2020? (Round your answer for excess net passive income to the nearest thousand.)

Accepted Answer

The answer of RGD Corporation was a C corporation from...

Question 16

Clampett, Incorporated, has been an S corporation since its inception. On July 15, 2021, Clampett, Incorporated, distributed $56,000 to J.D. His basis in his Clampett, Incorporated, stock on January 1, 2021, was $31,200. For 2021, J.D. was allocated $10,600 of ordinary income from Clampett, Incorporated, and no separately stated items. How much capital gain does J.D. recognize related to Clampett, Incorporated, in 2021?

Accepted Answer

A)  $66,600 
B)  $56,000 
C)  $20,600 
D)  $14,200 
E)  None of the choices are correct.

Question 17

Neal Corporation was initially formed as a C corporation with a calendar year-end. Neal elected S corporation status, effective January 1, 2020. On December 31, 2019, Neal Corporation reported earnings and profits of $150,000. Beginning in 2020, Neal Corporation reported the following information. Does Neal Corporation's S election terminate due to excess net passive income? If so, what is the effective date of the termination?

Accepted Answer

The answer of Neal Corporation was initially formed as a...

Question 18

Suppose that at the beginning of 2020 Jamaal's basis in his S corporation stock is $1,700 and he has a $10,700 debt basis associated with a $10,700 loan he made to the S corporation. In 2020, Jamaal's share of S corporation income is $4,700, and he received a $7,700 distribution from the S corporation. What is Jamaal's stock and debt basis after these transactions?

Accepted Answer

A)  $0 stock basis; $9,400 debt basis 
B)  $0 stock basis; $10,700 debt basis 
C)  $6,400 stock basis; $10,700 debt basis 
D)  $6,400 stock basis; $3,000 debt basis 
E)  None of the choices are correct.

Question 19

Jackson is the sole owner of JJJ Corporation (an S corporation). At the beginning of 2020, Jackson's basis in his JJJ stock was $8,000. For 2020, 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 2020?

Accepted Answer

The answer of Jackson is the sole owner of JJJ...

Question 20

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?

Accepted Answer

The answer of Parker is a 100percent shareholder of Johnson...

Exam 11: S Corporations

S corporations face the same restrictionsas partnerships and C corporations on using the cash method of accounting.

Which of the following is not a true statement?

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. What is Clampett, Incorporated's excess net passive income?

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

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

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January 1 of 2020. The following assets were owned by MWC on December 31, 2019. What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2020?