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Exam 22: S Corporations

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Question 31

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

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Question 32

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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 33

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Assume Joe Harry sells his 25% interest in Joe's S Corp. Inc. to Tyrone on January 29. Using the specific identification allocation method, how much income does Joe Harry report if Joe's S Corp. Inc. earned $200,000 from January 1 to January 28 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

S corporations generally recognize gain or loss on each asset they distribute in liquidation.

During 2014, CDE Corporation (an S corporation since its inception in 2012) 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 $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $40,000. What amount of gain (loss), if any, does CDE recognize on the distribution? What amount of income or loss, if any, does Clark recognize on the distribution and what is his basis in the land?

If an S corporation shareholder sells her stock to a nonresident alien, it will automatically terminate the S election.

An S corporation shareholder calculates his initial basis upon formation of the corporation like C corporation shareholders.

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

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.

During 2014, CDE Corporation (an S corporation since its inception in 2012) distributed a parcel of land to its sole shareholder Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?

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

Neal Corporation was initially formed as a C corporation with a calendar year end. Neal elected S corporation status, effective January 1, 2014. On December 31, 2013, Neal Corp. reported earnings and profits of $150,000. Beginning in 2014, Neal Corp. reported the following information. Does Neal Corp.'s S election terminate due to excess net passive income? If so, what is the effective date of the termination? $\begin{array} { | c | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Gross Receipts } \\\text { (including passive } \\\text { investment income) }\end{array} & \begin{array} { c } \text { Passive } \\\text { investment income }\end{array} & \begin{array} { c } \text { Corporate } \\\text { Earnings and Profits } \\\text { (end of year) }\end{array} \\\hline 2014 & \$ 400,000 & \$ 120,000 & \$ 140,000 \\\hline 2015 & \$ 300,000 & \$ 70,000 & \$ 100,000 \\\hline 2016 & \$ 500,000 & \$ 130,000 & \$ 70,000 \\\hline 2017 & \$ 400,000 & \$ 110,000 & \$ 40,000 \\\hline 2018 & \$ 600,000 & \$ 155,000 & \$ 1,000 \\\hline\end{array}$

ABC was formed as a calendar-year S corporation with Alan, Brenda and Conner as equal shareholders. On May 1, 2014, 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 2014 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline { \text { Period } } & { \text { Income } } \\\hline \text { January 1 through April 30 (120 days) } & \$ 200,000 \\\hline \text { May 1 through December 31 (245 days) } & 530,000 \\\hline \text { January 1 through December 31 } & \$ 730,000 \\\hline\end{array}$ 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 2014?

Like partnerships, S corporations determine their accounting periods and make accounting method elections at the entity level.

RGD Corporation was a C corporation from its inception in 2010 through 2013. However, it elected S corporation status effective January 1, 2014. RGD had $50,000 of earnings and profits at the end of 2013. RGD reported the following information for its 2014 tax year. $\begin{array} { | l | r | } \hline \text { Description } & \text { Amount } \\\hline \text { Consulting revenue } & \$ 120,000 \\\hline \text { Salary to owners } & ( 50,000 ) \\\hline \text { Employee wages } & ( 40,000 ) \\\hline \text { Depreciation expense } & ( 8,000 ) \\\hline \text { Long-term capital gain } & 10,000 \\\hline \text { Interest income } & 50,000 \\\hline \text { Dividend income } & \underline { 40,000 } \\\hline \text { Overall net income } & \mathbf { \$ 1 2 2 , 0 0 0 } \\\hline\end{array}$ What amount of excess net passive income tax is RGD liable for in 2014? (Round your answer for excess net passive income to the nearest thousand).

During 2013, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2014. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2013 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 2013 was $5,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

Jackson is the sole owner of JJJ corp. (an S corporation). At the beginning of 2014, Jackson's basis in his JJJ stock was $8,000. For 2014, JJJ reported a ($30,000) ordinary business loss (not a passive loss) and $4,000 of long-term capital gains. Assuming Jackson's tax basis and his at risk amount are the same, what is Jackson's stock basis at the end of the year and how much of the ordinary business loss is he allowed to deduct in 2014?

ABC Corp. elected to be taxed as an S Corporation when it was initially formed. During its first three years of existence, it reported passive investment income in excess of 25 percent of its gross receipts. Is ABC's S election terminated under the excess passive investment income test? If so, what is the effective date of the termination? If not, why not?

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2014, Bryant sold his CB shares to Don. CB reported business income for 2014 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline { \text { Period } } & { \text { Income } } \\\hline \text { January } 1 \text { through September } 30 \text { (273 days) } & \$ 200,000 \\\hline \text { October } 1 \text { through December } 31 \text { (92 days } ) & 530,000 \\\hline \text { January } 1 \text { through December } 31 & \$ 730,000 \\\hline\end{array}$ How much 2014 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?

C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.