S Corp Taxation Flashcards
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.
A corporation that has been an S Corporation from its inception may
- Have both passive and nonpassive income
- Be owned by a bankruptcy estate
Both - S corporations have both passive and nonpassive income. However, if an S corporation has excessive net passive income, a tax at the highest corporate rate is imposed on the excessive passive income. Excessive passive income is the amount that passive investment income exceeds 25 percent of the corporation’s gross receipts.
An S corporation may have shareholders that are individuals, decedent’s estates, bankruptcy estates, or trusts (charitable organizations and qualified plan trusts are included for post-97 tax years).
Bristol Corp. was formed as a C corporation on January 1, 1980, and elected S corporation status on January 1, 1987. At the time of the election, Bristol had accumulated C corporation earnings and profits which have not been distributed. Bristol has had the same 25 shareholders throughout its existence.
In 2015 Bristol’s S election will terminate if it
A. Increases the number of shareholders to 75.
B. Adds a decedent’s estate as a shareholder to the existing shareholders.
C. Takes a charitable contribution deduction.
D. Has passive investment income exceeding 90% of gross receipts in each of the three consecutive years ending December 31, 2014.
D
Which one of the following will render a corporation ineligible for S corporation status?
A. One of the stockholders is a decedent’s estate.
B. One of the stockholders is a bankruptcy estate.
C. The corporation has both voting and nonvoting common stock issued and outstanding.
D. The corporation has 150 stockholders.
D - To be eligible for S corporation status, a corporation must have 100 or less shareholders. All members of a family and their estates are treated as a single shareholder
Stahl, an individual, owns 100% of Talon, an S corporation. At the beginning of the year, Stahl’s basis in Talon was $65,000. Talon reported the following items from operations during the current year:
Ordinary loss $10,000
Municipal interest income 6,000
Long-term capital gain 4,000
Short-term capital loss 9,000
What was Stahl's basis in Talon at year-end? A. $50,000 B. $55,000 C. $56,000 D. $61,000
C - 65,000 - 10,000 + 6,000 + 4,000 - 9,000 = 56,000. The question is asking who the municipal interest income effects basis as well as the effect of the net capital losses. Shareholder’s tax basis is increased/decreased by:
Increases 1.Stock purchases 2. Capital contributions 3. Nonseparately stated income items 4. Separately stated income items Decreases 1. Nonseparately stated computed loss 2. Separately stated loss and deduction items 3. Distributions not reported as income by shareholder 4. Nondeductible expenses of corporation Separately stated items.
Tax-exempt income
Capital gains and losses
Section 1231 gains and losses
Charitable contributions
Passive gains, losses, and credits
Portfolio income
Foreign income
Investment income and expense
Depletion
Section 179 expense
Stone owns 100% of an S corporation and materially participates in its operations. The stock basis at the beginning of the year is $5,000. During the year, the corporation makes a distribution of $3,500 and passes through a loss from operations of $2,000 for the year. What loss can Stone deduct on Stone's personal tax return? A. $0 B. $1,500 C. $2,000 D. $5,500
B - The ordering rules for adjusting basis at the end of the tax year for S corporation shareholders (and partners in a partnership) is to first increase basis for income, then reduce it for distributions, and then reduce it for losses. Losses can be reported on a shareholder’s return only to the extent of basis, which is $1,500.
Beginning stock basis $5,000 Distribution (3,500) $1,500 Loss (limited to basis) (1,500) Ending stock basis -0-
A sole proprietorship incorporated on January 1 and elected S corporation status. The owner contributed the following assets to the S corporation:
Basis Fair market value Machinery $ 7,000 $ 8,000 Building 11,000 100,000 Cash 1,000 1,000
Two years later, the corporation sold the machinery for $4,000 and the building for $110,000. The machinery had accumulated depreciation of $2,000, and the building had accumulated depreciation of $1,000. What is the built-in gain recognized on the sale? A. $100,000 B. $ 99,000 C. $ 6,000 D. $0
D - The built in gains tax applies only when an existing C corporation makes an S corporation election. The built in gains tax does not apply when a sole proprietorship makes an S election, so the correct answer is $0.
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder
A. Must be returned to the S corporation.
B. Increases the shareholder’s basis for the stock.
C. Decreases the shareholder’s basis for the stock.
D. Has no effect on the shareholder’s basis for the stock
C - A distribution from an S corporation that has no accumulated earnings and profits reduces the basis of a shareholder’s stock. If the payment exceeds the shareholder’s basis in the stock, it is viewed as a payment in exchange for 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?
$4,000 - 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
Prail Corporation is a C corporation that on February 1, 2015 elected to be taxed as a calendar-year S corporation. On June 15, 2015, Prail sold land with a basis of $100,000 for $200,000 cash. The fair market value of the land on February 1, 2015 was $150,000. Prail had no other income or loss for the year and no carryovers from prior years.
What is Prail’s tax?
$17,500 - A C corporation that makes an S election and has unrealized built-in gains in its assets as of the election day must pay a built-in gains tax on this appreciation if it is recognized within the next 10 years.
When Prail makes the S election it has appreciation in the land of $50,000 ($150,000 - $100,000). Since the land was sold within 10 years of the election day, the first $50,000 of gain is taxed to the corporation at the rate of 35%.
Therefore, Prail must pay a tax of $17,500 ($50,000 * 35%).
