STUDY UNIT TEN S CORPORATIONS Flashcards
In computing the nonseparately stated income or loss of an S corporation, which of the following items can be deducted by the corporation?
A Intangible drilling and development costs that the corporation elects to expense.
B Corporate organizational costs.
C Charitable contributions.
D Interest expense on investments.
B Corporate organizational costs.
This answer is correct.
The computation of an S corporation’s nonseparately stated (ordinary) income or loss is governed by Sec. 1363(b). That section states that Sec. 248 applies to S corporations. Sec. 248 allows corporate organizational costs to be amortized over a period of not less than 180 months. Up to $5,000 of organizational expenses may be deducted in the taxable year in which the business begins. The $5,000 is reduced by the amount by which the cumulative costs of the organizational expenditures exceed $50,000. After incurring $55,000 of organizational expenses, no costs are deductible, and all costs are amortized over 180 months. The $5,000 deduction may be taken for expenditures but all of the expenditures incurred during the taxable year are considered when computing the phase-out.
On January 1, 2014, Mr. Hyde purchased 50% of S Corporation Z’s only class of stock outstanding for $150,000. On December 1, 2014, he purchased the other 50% of Z’s stock for $150,000. For 2014, Z incurred an ordinary loss of $237,250. How much of the loss can Mr. Hyde deduct on his personal income tax return for 2014? A $217,100 B $128,700 C $237,250 D $118,625
B $128,700
This answer is correct.
An S corporation shareholder includes his or her pro rata share of loss from the S corporation [Sec. 1366(a)]. Sec. 1377(a) defines pro rata share as the taxpayer’s share of loss determined on a per-day and then a per-share basis. The loss for the whole year was $237,250, which is $650 per day ($237,250 ÷ 365 days). Therefore, Mr. Hyde’s share is $128,700 [$118,625 + (31 days × $650 × 50%)] because he owned 50% of the stock for the full year and the other 50% for 31 days.
Dart Corp., a calendar-year S corporation, had 60,000 shares of voting common stock and 40,000 shares of nonvoting common stock issued and outstanding. On February 23, 2014, Dart filed a revocation statement with the consent of shareholders holding 30,000 shares of its voting common stock and 5,000 shares of its nonvoting common stock. Dart’s S corporation election A Terminated as of January 1, 2015. B Did not terminate. C Terminated as of January 1, 2014. D Terminated on February 24, 2014.
B Did not terminate.
This answer is correct.
An S corporation election may be revoked with the consent of shareholders holding more than 50% of the outstanding shares of stock (voting and nonvoting) on the day the revocation is made. However, Dart Corporation’s election would not terminate because less than 50% of the voting and nonvoting shareholders consented to the revocation.
XYZ Corporation (an S corporation) had the following items of income and deductions for 2014. Charles and Diane are equal shareholders in the corporation. They each had an adjusted stock basis of $30,000 on January 1, 2014. Gross receipts from sales $100,000 Cost of goods sold 50,000 Depreciation 10,000 Charitable contributions 10,000 Interest income 5,000 Tax-exempt interest 3,000 Other operating costs 63,000 Diane received a distribution of $15,000 on June 1, 2014. Her basis on January 1, 2015, is A $3,500 B $0 C $15,000 D $2,500
D $2,500
This answer is correct.
A shareholder’s stock basis is affected by the operations of the corporation. All of the items will affect Diane’s stock basis, which will be $2,500 in January 2015. Only half of the items are allocated to Diane, except for the distribution.
Adjusted stock basis, 1/1/14
$ 30,000
Gross receipts
50,000
Cost of goods sold
(25,000)
Depreciation
(5,000)
Charitable contributions
(5,000)
Interest income
2,500
Tax-exempt interest
1,500
Operating costs
(31,500)
Distribution
(15,000)
Adjusted stock basis, 1/1/15
$ 2,500
On January 1, 2014, Terry purchased 50% of Halt, an S corporation, for $150,000. At the end of 2014, Halt incurred an ordinary loss of $320,000. How much of the loss can Terry deduct on his personal income tax return for 2014? A $320,000 B $150,000 C $160,000 D $75,000
B $150,000
This answer is correct.
The amount of losses and deductions an S corporation shareholder can claim is limited to the adjusted basis of the shareholder’s stock. Thus, for 2014, Terry can deduct only $150,000 of the loss. The remaining $10,000 of loss allocated to Terry may be carried over to 2015.
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 Gain or loss from the sale of collectibles.
C Section 1245 gain.
D Unearned revenue.
B Gain or loss from the sale of collectibles.
This answer is correct.
S corporation items of income, deduction, and credit, that could alter the tax liability of shareholders if taken into account by them on their personal returns, are required to be stated separately. Separately stated items include net long- and short-term capital gains and losses. Since gains or losses from the sale of collectibles would be a capital gain, they are separately stated on Form 1120S, Schedule K-1.
Maui Corporation (an S corporation) reported a $72,000 ordinary loss during 2014. At the beginning of 2014, Elvis and Frank equally owned all of Maui’s stock. On July 1, 2014, Frank gave one-fourth of his stock to his son, George. What amount of the 2014 loss is allocated to George? A $18,000 B $4,537 C $9,000 D $0
B $4,537
This answer is correct.
An S corporation shareholder includes his or her pro rata share of loss from the S corporation [Sec. 1366(a)]. Sec. 1377(a) defines pro rata share as the taxpayer’s share of loss determined on a per-day and then a per-share basis. Therefore, the amount of loss allocated to George is $4,537 ($72,000 × 12.5% × 184 ÷ 365).
For 2014, VBN, an S corporation, has accumulated earnings and profits (E&P) of $50,000 and a zero balance in its accumulated adjustment account. VBN distributes $230,000 to its sole shareholder, Raymond. His basis in the stock is $140,000. How should Raymond handle the distribution?
A $90,000 as dividend, $50,000 as return of capital, and $90,000 as nontaxable.
B $50,000 as a taxable dividend, $140,000 as return of capital, and $40,000 as capital gain.
C $230,000 as a taxable distribution.
D $50,000 as a taxable dividend, $90,000 as return of capital, and $90,000 as capital gain.
B $50,000 as a taxable dividend, $140,000 as return of capital, and $40,000 as capital gain.
This answer is correct.
Since the S corporation does not have an accumulated adjustment account balance, any distribution is first treated as a dividend to the extent of accumulated E&P. After the accumulated E&P balance is reduced to zero, any distribution remaining will reduce any remaining basis of the shareholder’s stock, and then any remainder will be treated as a capital gain from the sale of property. Therefore, Raymond will handle the distribution by treating $50,000 as a taxable dividend, $140,000 as a return of capital, and $40,000 as capital gain.
Beech Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. At the beginning of the current year, Gold owned 50% of the 100 issued shares of Beech stock, and had a $3,000 tax basis in the Beech stock. During the current year, Beech had $200,000 in net business income and $4,000 in Oak County municipal bond interest income. Beech made no distributions to its shareholders. What was Gold’s tax basis in Beech stock at year end? A $105,000 B $102,000 C $104,000 D $103,000
A $105,000
This answer is correct.
The shareholder’s stock basis would be $105,000 [$3,000 beginning basis + $100,000 income allocation ($200,000 × 50% ownership interest) + $2,000 municipal interest ($4,000 × 50% ownership interest)]. The stock basis is increased for the portion of the municipal interest in order for that income to never be subject to taxation. If the basis was not increased, when the interest was later sold, gain would be realized on the portion of the business attributable to that income
Mr. Star has a $100,000 basis in the stock of an S corporation. Which of the following items will not decrease his basis in the stock?
A All loss and deduction items of the S corporation that are separately stated and passed through to the shareholder.
B Distributions by the S corporation that are a return of capital.
C The amount of the deduction for depletion that is more than the basis of the property being depleted.
D Any expense of the S corporation that is not deductible in figuring its income and not properly chargeable to the capital account.
C The amount of the deduction for depletion that is more than the basis of the property being depleted.
This answer is correct.
Sec. 1367(a)(2) provides guidelines covering decreases in the basis of S corporation stock. Decreases in basis are caused by distributions, losses and deductions included in any separately stated items of loss, any nonseparately stated (ordinary) loss, and any expense of the corporation that is not deductible in computing its taxable income and not properly chargeable to the capital account. Basis is also decreased by the amount of the deduction for depletion that does not exceed the basis of the property being depleted. The amount of any deduction for depletion that exceeds the property’s basis does not decrease the shareholder’s basis in the S corporation stock.
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return? A $160,000 B $28,000 C $188,000 D $132,000
A $160,000
This answer is correct.
The amount of income that would have been reported on Carson’s tax return related to the S corporation distribution would be his proportionate share of the income of the entity. This amount would increase the basis in the S corporation stock and would result in the dividend not being double taxed or acting as a deduction. Accordingly, the income was $160,000 ($400,000 corporation income × 40%)
Village Corp., a calendar-year corporation, began business in 2011. Village made a valid S corporation election on December 5, 2014, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout 2015. On what date did Village’s S status become effective?
A. December 5, 2015.
B. January 1, 2015.
C. January 1, 2014.
D. December 5, 2014.
B. January 1, 2015.
Answer (B) is correct.
An S corporation election made within the first 2 1/2 months of the taxable year is effective on the first day of that year. Elections made after this date are effective on the first day of the next taxable year, presuming that all S corporation election requirements have been satisfied on each day following the S corporation election.
(10.1.16)
The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election?
A. The corporation’s capital losses can be claimed on the tax returns of the shareholders.
B. The corporation’s net operating loss carryovers from prior years are immediately deductible by the shareholders.
C. The shareholders of the S corporation will be taxed only on distributions from the corporation.
D. The corporation’s tax-free fringe benefits for the shareholders will be deductible by the corporation
A. The corporation’s capital losses can be claimed on the tax returns of the shareholders.
Answer (A) is correct.
Capital losses of the corporation will flow-through to the shareholders, who may use them to offset any of their own capital gains.
(10.2.63)
Which of the following statements about qualifying shareholders of an S corporation is correct?
A. A general partnership may be a shareholder.
B. Only individuals may be shareholders.
C. Nonresident aliens may be shareholders.
D. Individuals, estates, and certain trusts may be shareholders.
D. Individuals, estates, and certain trusts may be shareholders.
Answer (D) is correct.
Generally, only an individual, an estate, or a qualified trust can be a qualifying shareholder of an S corporation.
(10.1.24)
An S corporation had the following income and expenses:
Sales $240,000
Rent expense 25,000
Entertainment expense 5,000
Interest income 1,500
Contributions to qualifying charities 600
Section 179 expense 3,000
Depreciation expense 1,800
What would be reported as ordinary income on the corporation’s income tax return?
A. $213,200
B. $210,700
C. $208,600
D. $206,100
B. $210,700
Answer (B) is correct.
Ordinary income includes the amounts of sales, rent expense, the allowable portion of entertainment expense, and depreciation expense. All other amounts must be separately stated because they will have different effects on the shareholders. Therefore, ordinary income is calculated as follows:
Sales
$240,000
Rent expense
(25,000)
50% Entertainment expense
(2,500)
Depreciation
(1,800)
Ordinary income
$210,700
(10.2.65)
