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Exam 11: S Corporations

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Question 21

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Similar to an S corporation shareholder's stock basis, the AAA may not have a negative balance.

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Question 22

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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.

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Question 23

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As in partnerships, an S corporation shareholder's basis is dynamic and must be adjusted annually.

Assume Joe Harry sells his 25 percent interest in Joe's S Corp., Inc., to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp., Inc., earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

Vanessa is the sole shareholder of V Corporation. V Corporation was formerly a C corporation but is currently an S corporation. At the end of 2019, before considering distributions, V Corporation's accumulated adjustments account (AAA) balance was $35,000 and its accumulated earnings and profits from its years as a C corporation was $10,000. On July 1, V Corporation distributed $60,000 to Vanessa. What is the amount and character of income Vanessa must recognize on the distribution if her stock basis before considering the distribution was $60,000? What is Vanessa's stock basis after accounting for the distribution?

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

During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the S corporation's AAA balance and the individual shareholder's basis in the stock.

Bobby T (75 percent owner) would like to terminate the S corporation status of DJ, Inc., but Dallas (5 percent owner) does not want to terminate S corporation status. Bobby T can terminate the S corporation status for DJ, Inc., without Dallas's consent.

Clampett, Inc., has been an S corporation since its inception. On July 15, 2020, Clampett, Inc., distributed $50,000 to J.D. His basis in his Clampett, Inc., stock on January 1, 2020, was $30,000. For 2020, 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 2020?

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

S corporations are not entitled to a dividends received deduction.

The estimated tax payment rules for S corporations generally follow the rules for C corporations.

Distributions to owners may not cause the AAA to go negative or to become more negative.

When an S corporation distributes appreciated property to its shareholders, the S corporation recognizes gain as though it had sold the appreciated property for its fair market value just prior to the distribution.

ABC was formed as a calendar-year S corporation with Alan, Brenda, and Conner as equal shareholders. On May 1, 2019, ABC's S election was terminated after Conner sold his ABC shares (one-third of all shares) to his solely owned C corporation, Conner, Inc. ABC reported business income for 2019 as follows: (Assume that there are 365 days in the year.) If ABC uses the specific identification method to allocate income, how much will it allocate to the S corporation short year and C corporation short year?

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:

Jason is one of 100 shareholders in Jace Corporation. The remaining 99 shareholders are unrelated individual U.S. residents. During the year, Jason gave several of his shares in Jace Corp. to his brother as a birthday present and to his best friend, Hal (unrelated to all shareholders in Jace Corp.), as a wedding present. After these gifts, Jace Corp. has 102 shareholders. Is Jace Corp. prohibited from electing to become an S corporation? Explain.

The specific identification method and monthly allocation method are methods an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

SEC Corporation has been operating as a C corporation since 2016. It elected to become an S corporation, effective January 1, 2019. On December 31, 2018, SEC reported a net unrealized built-in gain of $10,000. In addition to other transactions in 2019, SEC sold inventory it owned at the beginning of 2019 (it did not sell any other assets it owned at the beginning of 2019). At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000. SEC sold the inventory for $28,000. If SEC had been a C corporation in 2019, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2019? Assume the corporate tax rate is 21%.

For an S corporation shareholder to deduct it, a loss must clear three separate tax provision hurdles: (1) tax-basis, (2) at-risk amount, and (3) tax shelter rules.