Question 1

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $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% 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?

Accepted Answer

A)  $0. 
B)  $5,000. 
C)  $12,500. 
D)  $15,000. 
E)  None of the choices are correct.

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A)  $0. 
B)  $5,250. 
C)  $26,250. 
D)  $21,000. 
E)  None of the choices are correct.

Question 4

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. How much capital gain does J. D. recognize related to Clampett, Inc. in 2019?

Accepted Answer

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

Question 5

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?

Accepted Answer

A)  $0 stock basis; $8,000 debt basis. 
B)  $0 stock basis; $10,000 debt basis. 
C)  $5,000 stock basis; $10,000 debt basis. 
D)  $5,000 stock basis; $3,000 debt basis. 
E)  None of the choices are correct.

Question 6

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

Accepted Answer

A) True 
 B)False

Question 7

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:

Accepted Answer

A)  Shareholder's remaining stock basis, prior C corporation earnings and profit, the AAA account. 
B)  Shareholder's remaining stock basis, the AAA account, prior C corporation earnings and profit. 
C)  Prior C corporation earnings and profit, the AAA account, shareholder's remaining stock basis. 
D)  The AAA account, prior C corporation earnings and profit, shareholder's remaining stock basis. 
E)  None of the choices are correct.

Question 8

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?

Accepted Answer

A)  90. 
B)  92. 
C)  95. 
D)  97. 
E)  None of the choices are correct.

Question 9

Hazel is the sole shareholder of Maple Corp. In 2018 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2018, Maple elected S corporation status. During 2019 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 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 2019 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?

Accepted Answer

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

Question 10

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

Accepted Answer

A)  Passive income. 
B)  Investment interest income. 
C)  Dividends. 
D)  Short-term capital gains. 
E)  All of the choices are considered investment income for the net investment income tax.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $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% 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. How much, if any, of the distribution is taxable as a dividend?

Accepted Answer

A)  $0. 
B)  $10,000. 
C)  $12,500. 
D)  $15,000. 
E)  None of the choices are correct.

Question 13

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?

Accepted Answer

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

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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?

Accepted Answer

The answer of During 2018, MVC operated as a C...

Question 16

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?

Accepted Answer

A)  $10,500. 
B)  $10,000. 
C)  $2,100. 
D)  $0. 
E)  None of the choices are correct.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

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

Question 20

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%. Clampett, Inc.'s taxable income in 2019 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2019?

Accepted Answer

A)  $10,500. 
B)  $10,000. 
C)  $2,100. 
D)  $0. 
E)  None of the choices are correct.

Exam 11: 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.

S corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

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:

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

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

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

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

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