S Corps - Becker

Question 1

Boles Corp., an accrual-basis calendar-year S corporation, has been an S corporation since its inception and is not subject to the uniform capitalization rules. In the current year, Boles recorded the following:
Gross receipts 	$ 50,000 
Dividend income from investments	5,000
Supplies expense 	2,000
 Utilities expense 	1,500

What amount of net business income should Boles report on its Form 1120S, U.S. Income Tax Return for an S corporation, Schedule K?

Answer 1

Choice “d” is correct. An S corporation reports both separately stated and non-separately stated (net business) items of income. The dividend income is a separately stated item and is not included in the calculation of net business income. Therefore, net business income is calculated as follows:
Gross receipts $ 50,000
Supplies expense (2,000)
Utilities expense (1,500)

Net business income $ 46,500

Question 2

Which of the following can be an advantage of a limited liability company over an S corporation?

Answer 2

Rule: IRC Section 311 controls the taxability of corporate distributions. An S corporation (and a C corporation) recognizes a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.

Choice “d” is correct. An S corporation cannot distribute appreciated property to its shareholders without gain. In general, a partnership can distribute appreciated property tax-free to its partners (in general, a non liquidating distribution to a partner is nontaxable). Since a limited liability company (LLC) is taxed like a partnership (an LLC properly structured and with two or more owners is taxed like a limited partnership with no general partners), a limited liability company can distribute appreciated property to its owners tax-free.

Question 3

Tap, a calendar-year S corporation, reported the following items of income and expense in the current year:
Revenue $ 44,000
Operating expenses 20,000
Long-term capital loss 6,000
Charitable contributions 1,000
Interest expense 4,000
What is the amount of Tap’s ordinary income?

Answer 3

Rule: IRC Section 1366 controls the pass-through of S corporation income items to shareholders. In general, items are divided into separately stated items (items that could potentially affect the tax liability of the shareholders) and non-separately stated items. Non-separately stated items are lumped together and constitute the S corporation’s ordinary income. Separately stated items are passed through to the shareholders (in a manner similar to partnerships) and retain their tax attributes to the shareholders.

Choice “d” is correct. Tap’s ordinary income is calculated as follows:

Revenue $ 44,000

Operating expenses (20,000)

Interest expense (4,000)

Ordinary income $ 20,000

The long-term capital loss and the charitable contributions are not included in Tap’s ordinary income. They are separately stated items and thus are passed through to the shareholders and retain their tax attributes.

Question 4

Miyasyke, Inc., a calendar year S corporation, has 5 equal shareholders at the end of the tax year. Miyasyke had $75,000 of taxable income. Miyasyke made distributions to its shareholders of $32,000 each, for a total of $160,000. Each shareholder’s basis in the S corporation is $100,000 at the beginning of the tax year. What amount from Miyasyke should be included in each shareholder’s gross income?

Answer 4

15000. Each shareholder reports his/her pro rata share of the S corporation’s taxable income in his or her gross income. The distributions are not taxable to the extent the shareholders’ basis exceeds the distribution (and increased for any income reported by them during the year).