REG 44 - S Corporation Taxation Flashcards
Which of the following is an eligibility requirement in 2014 to file a valid election to be taxed as an S corporation?
A. Must have no more than 75 shareholders, and a husband and wife who each own stock are counted as two shareholders.
B. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as two shareholders.
C. Must have no more than 100 shareholders, and a husband and wife who each own stock are counted as one shareholder.
D. Must have no more 75 shareholders, and a husband and wife who each own stock are counted as one shareholder.
C. The shareholder limit is 100 and members of the same family count as one shareholder.
After a corporation's status as an S corporation is revoked or terminated, how many years is the corporation required to wait before making a new S election, in the absence of IRS consent to an earlier election? A. 1 B. 3 C. 5 D. 10
C. Once a corporation’s S status is revoked or terminated, the corporation must wait five years before making a new S election, in the absence of IRS consent to an earlier election.
Village Corp., a calendar year corporation, began business in 2002. Village made a valid S Corporation election on December 5, 2013, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout 2013 and 2014.
On what date did Village's S status become effective? A. January 1, 2013 B. January 1, 2014. C. December 5, 2013. D. December 5, 2014.
B. An S Corporation election is effective for the current tax year, if made by the 15th day of the third month of the tax year. Since the election is after to March 15, 2013 it is effective for 2014.
T/F: ABC, an S corporation since inception, has passive investment income for three consecutive years following the year a valid S election was made. ABC’s corporate S election is terminated as of the first day of the fourth year.
False.
An involuntary termination can occur due to a violation of the limit on passive investment income exceeding 25% of gross receipts for three consecutive years (see discussion of S corporate taxes below). This termination is effective on the first day of the fourth consecutive year. This provision only applies if the S corporation has earnings and profits (from previous C corporation years) on its balance sheet.
T/F: Shares that vary solely in voting rights are considered as two classes of stock for purposes of qualifying for an election to be treated as an S corporation.
False. They are considered as one class of stock for this purpose.
T/F: Termination will generally create a short S year and a short C year.
True
Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for a Corporation, Schedule K-1?
A. Mark-to-market income.
B. Unearned revenue.
C. Section 1245 Gain.
D. Gain or loss from the sale of collectibles.
D. Collectible gain is taxed at a maximum rate of 28% and can be offset with collectible losses, so it needs to be separately stated.
L Corporation, an S electing corporation, pays single coverage health insurance premiums of $4,000 per year and family coverage premiums of $7,000 per year (the $7,000 includes single and family coverage). SH owns 10 percent of L stock and L pays SH's family coverage under the health insurance plan. What amount of insurance premium is included in SH's gross income? A. $ 0 B. $ 700 C. $4,000 D. $7,000
D. The entire premium payment must be included in income since SH owns 2% or more of the L’s stock. If SH owned less than 2% of the stock, the entire premium payment could be excluded from income..
B Corporation has been a calendar-year S electing corporation since its inception. S1 and S2 each own half of the stock with a basis of $12 and $9, respectively. This year B reported ordinary income of $81 and $10 of tax-exempt income. B also made a $51 cash distribution to each shareholder at year end. What is S1's basis after the distribution? A. $ 1.5 B. $ 6.5 C. $52.5 D. $57.5
B. S1’s beginning basis is $12. It is increased by 50% of the taxable and tax-exempt income (($81 + $10) * 50% = $45.50) and decreased by the $51 distribution.
$12 + $45.50 - $51 = $6.50
Bern Corp., an S corporation, had an ordinary loss of $36,500 for the year ended December 31, 2014. At January 1, 2014, Meyer owned 50% of Bern's stock. Meyer held the stock for 40 days in 2014 before selling the entire 50% interest to an unrelated third party. Meyer's basis for the stock was $10,000. Meyer was a full-time employee of Bern until the stock was sold. Meyer's share of Bern's 2014 loss was A. $0 B. $2,000 C. $10,000 D. $18,250
B. Meyer’s share of Bern Corp.’s 2014 loss should be Meyer’s pro rata share of the corporation’s income.
Since Meyer owned 50 percent of Bern Corp. for the first 40 days of Bern Corp.’s tax year, Meyer’s portion of the loss would be $2,000 (= 50 percent ownership* (40 days/365 days) * $36,500 ordinary loss). Meyer’s share of the corporation’s loss is dependent on his/her ownership percentage, It is unaffected by Meyer’s being an employee of the corporation.
T/F: On March 31, TP purchased 50% of the stock in a calendar year S corporation. TP will be entitled to deduct 50% of the annual loss reported by the corporation this year.
False.
The annual loss would be calculated with the daily share of loss for the time that TP owned stock.
Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year.
What amount of the $30,000 cash distribution is taxable to Baker? A. $0 B. $7,000 C. $4,000 D. $30,000
C. Calculate basis in an S corporation as follows: The current basis of $25,000 is increased by the $1,000 of income to $26,000, then reduced for the distribution of $30,000 which would reduce the basis to $0 and produce a $4,000 gain. The $3,000 loss is suspended until there is more basis in the future.
If the amount of the distribution exceeds the adjusted basis of the stock, such excess shall be treated as gain from the sale or exchange of property.
T/F: All S corporations need to account for distributions to shareholders using an accumulated adjustments account.
False.
Only if S corporations have an accumulated E&P from a previous status as a C Corp. are subject to a complex distribution system including the use of an AAA.
