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Exam 22: S Corporations

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Question 41

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Hazel is the sole shareholder of Maple Corp.In 2019 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits).In 2019,Maple elected S corporation status.During 2020 Maple reported $12,000 of ordinary business income and no separately stated items.It also distributed $25,000 to Hazel.What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2020 (after accounting for the distribution)if her basis at the beginning of the year was $5,000?

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The first $12,000 of the distribution co...

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Question 42

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During 2019,MVC operated as a C corporation.However,it made an election to be taxed as an S corporation effective January 1,2020.MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory.At the end of 2019 its inventory basis under the LIFO method was $80,000.If MVC had used the FIFO method of accounting for its inventory,it would have had a $100,000 basis in its inventory.Finally,MVC's regular taxable income in 2019 was $5,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

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MVC must pay $4,200 [($100,000 FIFO inve...

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Question 43

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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.

AIRE was initially formed as an S corporation three years ago.AIRE has four equal shareholders,Adam,Irene,Raymond,and Ethan.Raymond and Ethan would like to terminate the S election.However,Adam and Irene are opposed to the idea.Can Raymond and Ethan make a voluntary election to terminate the S election without the consent of Adam and/or Irene? Explain.

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 daily method of allocating income between the S corporation short tax year (January 1-April 30)and the C corporation short tax year (May 1-December 31),how much income will it report on its S corporation short tax year return and its C corporation short tax year return for 2019?

S corporation losses allocated to a shareholder that are not deductible due to the tax-basis limitation rules are carried over by the shareholder to future years for potential utilization.

During 2019,CDE Corporation (an S corporation since its inception in 2017)liquidates this year by distributing a parcel of land to its sole shareholder,Clark.The fair market value of the land at the time of the distribution was $100,000 and CDE's tax basis in the property was $130,000.Before considering the effects of the distribution,Clark's basis in his CDE stock was $40,000.What amount of loss,if any,does CDE recognize on the distribution? What amount of income,if any,does Clark recognize on the distribution and what is his basis in the land?

An S corporation election may be voluntarily or involuntarily terminated.

Hector formed H Corporation as a C corporation at the beginning of 2019.Hector was the sole shareholder of H Corporation.H Corporation reported 2019 taxable income (and earnings and profits)of $200,000.At the beginning of 2020,H Corporation elected S corporation status.During 2020,H Corporation had a rough year,reporting an ordinary business loss of $70,000,$4,000 of dividend income,and $3,000 of interest income.H Corporation also distributed $15,000 to Hector.What is the amount and character of gain/income Hector must recognize on the distribution (if any)? What is the balance in H Corporation's accumulated adjustments account (AAA)at the end of 2020?

Which of the following is not a separately stated item for S corporations?

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.

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.What is J.D.'s basis in his Clampett,Inc.,stock after all transactions in 2020?

Assume that Clampett,Inc.,has $200,000 of sales,$150,000 of cost of goods sold,$60,000 of interest income,and $40,000 of dividends.Assume that Clampett,Inc.,never operated as a C corporation and that the corporate tax rate is 21 percent.What is Clampett,Inc.'s excess net passive income tax?

S corporations are required to file Form 1120S,U.S.Income Tax Return for an S Corporation,with the IRS by the 15th day of the fourth month after the S corporation's year-end.

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?

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

XYZ Corporation (an S corporation)is owned by Jane and Rebecca,who are each 50 percent shareholders.At the beginning of the year,Jane's basis in her XYZ stock was $40,000.XYZ reported the following tax information for 2019. Required: a.What amount of ordinary business income is allocated to Jane? b.What is the amount and character of separately stated items allocated to Jane? c.What is Jane's basis in her XYZ Corporation stock at the end of the year?

CB Corporation was formed as a calendar-year S corporation.Casey is a 60 percent shareholder and Bryant is a 40 percent shareholder.On September 30,2019,Bryant sold his CB shares to Don.CB reported business income for 2019 as follows: (Assume that there are 365 days in the year.) How much 2019 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

The specific identification method is a method an S corporation may use to allocate its income across short tax years that result from an involuntary S election termination.

J.D.formed Clampett,Inc.,as a C corporation (calendar tax year) with J.D.,Granny,and Jethro,Inc.(a C corporation) as shareholders.On January 15,2019,Jethro,Inc.,sold all its shares to Jane Hathaway.On February 28,2019,Clampett,Inc.,filed an S corporation election,with J.D.,Granny,and Jane all consenting to the election.What is the earliest effective date of the S election?