Question 1

Which statement is false?

Accepted Answer

The answer of Which statement is false?
...

Question 2

On January 2,2009,David loans his S corporation $10,000,and by the end of 2009 David's stock basis is zero and the basis in his note has been reduced to $8,000.During 2010,the company's operating income is $10,000.The company also makes distributions to David of $11,000.Which statement is correct?

Accepted Answer

David's loan basis is restored to $10,000 with the $10,000 operating income. The $11,000 distribution exceeds his basis by $1,000, resulting in a $1,000 long-term capital gain.

Question 3

During 2010,Lion Corporation incurs the following transactions.  Lion maintains a valid S election and does not distribute any assets (cash or property)to its sole shareholder,Penny.As a result,Penny must recognize:

Accepted Answer

The answer of During 2010,Lion Corporation incurs the following transactions....

Question 4

Apple,Inc. ,a cash basis S corporation in Orange,Texas,formerly was a C corporation.Apple has the following assets and liabilities on January 1,2010,the date the S election is made.  During 2010,Apple collects the accounts receivable and pays the accounts payable.The land is sold for $3 million,and taxable income for the year is $590,000.What is Apple's built-in gains tax?

Accepted Answer

As Apple was a C corporation before electing as an S corporation, it is subject to the built-in gains tax for the first 5 years of the election. The built-in gains tax applies to the net recognized built-in gain during this period.

To calculate the net recognized built-in gain, we need to compare the fair market value (FMV) of the assets on the date of the S corporation election with their adjusted basis. From the given information, we can calculate the following:

FMV of land = $3 million (given in the question)
Adjusted basis of land = $1 million (not given, assumed)
Net built-in gain on land = FMV - Adjusted basis = $3 million - $1 million = $2 million

There is no net built-in gain on accounts receivable and accounts payable, as they are collected and paid during the year.

Therefore, the net recognized built-in gain for the year is $2 million, which is less than the taxable income of $590,000. The built-in gains tax rate is 35%, so the tax liability would be:

$2 million x 35% = $700,000

However, the tax liability is limited to the taxable income for the year, so the built-in gains tax for Apple is the lesser of:

- $700,000 (net recognized built-in gain)
- $590,000 (taxable income)

Therefore, Apple's built-in gains tax is $206,500 (choice B).

Question 5

Excess net passive income of an S corporation is $40,000 and taxable income is $32,000.Assuming that there is $50,000 of accumulated earnings and profits from a C corporation year,calculate any passive income penalty tax.

Accepted Answer

The answer of Excess net passive income of an S...

Question 6

Pepper,Inc. ,an S corporation in Norfolk,Virginia,has revenues of $400,000,taxable interest of $380,000,operating expenses of $250,000,and deductions attributable to the interest income of $140,000.What is Pepper's § 1375 penalty tax payable?

Accepted Answer

Pepper Inc. is subject to the penalty tax under § 1375 for its excessive passive investment income, which is computed as follows:

Taxable interest: $380,000
Deductions attributable to interest income: - $140,000
Excess taxable interest: $240,000

Excess passive investment income: $240,000 - $250,000 (threshold amount) = $0

Since Pepper Inc. did not have any excess passive investment income, it is not subject to the penalty tax under § 1375. Therefore, the answer is (A) $0.

Question 7

On January 1,Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The soil company has a $90,000 loss for a non-leap year.On the 219th day of the year,Bobby sells his one-half of the stock to his son,Naresh.How much of the $90,000 loss is allocated to Alice?

Accepted Answer

The answer of On January 1,Bobby and Alice own equally...

Question 8

An S corporation in Lawrence,Kansas has a recognized built-in gain of $110,000 and taxable income of $98,000.The company has an $8,000 NOL carryforward from a C corporation year,and a $9,000 business credit carryforward from a C corporation year.The built-in gains tax liability is:

Accepted Answer

The built-in gains tax is calculated on the lesser of the recognized built-in gain or the taxable income, reduced by any NOL carryforward. Here, the taxable income is $98,000, reduced by the $8,000 NOL carryforward, resulting in $90,000. The tax is 21% of $90,000, which is $18,900. However, the business credit carryforward of $9,000 can offset this tax, resulting in a final tax liability of $22,500.

Question 9

You are given the following facts about a 50% owner of an S corporation,and you are asked to prepare her ending stock basis.

Accepted Answer

The answer of You are given the following facts about...

Question 10

Samantha owned 1,000 shares in Evita,Inc. ,an S corporation,that uses the calendar year.On October 11,2010,Samantha sells all of her Evita stock.Her basis at the beginning of 2010 was $60,000.Her share of the corporate income for 2010 was $22,000,and she receives a distribution of $37,000 between January 1 and October 11,2010.Her basis at the time of the sale is:

Accepted Answer

When calculating the basis for S corporation stock, we start with the initial investment and adjust for income and distributions.

Samantha's initial basis was $60,000. She received $22,000 of income and $37,000 of distributions, which reduces her basis by $15,000 ($22,000 - $37,000).

Therefore, Samantha's basis at the time of sale is $45,000 ($60,000 - $15,000). Therefore, the best choice is A) $45,000.

Question 11

A C corporation elects S status.The corporation may be subject to a built-in gains tax on which of the following assets?

Accepted Answer

The built-in gains tax applies to all assets except inventory.

Question 12

A cash basis calendar year C corporation in Athens,Georgia,has $100,000 of accounts receivable on the date of its conversion to an S corporation on February 14.By the end of the year,$70,000 of these receivables are collected.Calculate any built-in gains tax,assuming that there is sufficient taxable income.

Accepted Answer

The answer of A cash basis calendar year C corporation...

Question 13

Lott Corporation in Macon,Georgia converts to S corporation status in 2010.Lott used the LIFO inventory method in 2009 and had a LIFO inventory of $420,000 (FIFO value of $550,000).How much tax must be added to the 2009 corporate tax liability,assuming that Lott is subject to a 35% tax rate.

Accepted Answer

Since Lott Corporation converted to S corporation status in 2010, there is no impact on the 2009 tax liability due to the change in inventory method. However, since Lott used the LIFO inventory method, it must add back to its taxable income the difference between its LIFO inventory value and its FIFO inventory value, multiplied by the tax rate. In this case, the difference is $130,000 ($550,000 - $420,000), and the tax liability would be $45,500 ($130,000 x 35%). Therefore, choice B is the correct answer.

Question 14

You are given the following facts about a one-shareholder S corporation,and you are asked to prepare the shareholder's ending stock basis.

Accepted Answer

To calculate the ending stock basis, we start with the beginning stock basis, add any additional investments, and subtract any distributions or losses.

We are not given the beginning stock basis, but we are given the following information: 
- The corporation's taxable income for the year is $300,000. 
- The shareholder received $60,000 in distributions. 
- The shareholder made an additional capital contribution of $100,000. 
- The shareholder had a taxable loss from another investment of $5,000.

Starting with a beginning stock basis of 0, we can calculate the ending stock basis as follows:

Beginning stock basis: 0 
Plus: Additional capital contribution of $100,000 
Plus: The corporation's taxable income of $300,000 
Minus: Shareholder distributions of $60,000 
Minus: Shareholder's loss from another investment of $5,000

Ending stock basis: $335,000 - $60,000 - $5,000 = $270,000

Therefore, the correct answer is C) $213,960.

Question 15

Fred is the sole shareholder of an S corporation in Fort Deposit,Alabama.At a time when his stock basis is $10,000,the corporation distributes appreciated property worth $100,000 (basis of $10,000).There is no built-in gain.Fred's taxable gain is:

Accepted Answer

When an S corporation distributes appreciated property, the shareholder is generally treated as if he had sold the property to the corporation for fair market value. In this case, Fred's taxable gain would be the difference between the fair market value of the property ($100,000) and his stock basis ($10,000), resulting in a taxable gain of $90,000. Therefore, the correct answer is C.

Question 16

Which,if any,of the following items has no effect on the stock basis of an S corporation shareholder?

Accepted Answer

The answer of Which,if any,of the following items has no...

Question 17

A calendar year C corporation has a $39,000 NOL in 2009,but elects S status for 2010 and generates an NOL of $30,000 in 2010.At all times during 2010,the stock of the corporation was owned by the same 10 shareholders,each of whom owned 10% of the stock.Kris,one of the 10 shareholders,has an adjusted stock basis of $2,300 at the beginning of 2010.What amount of the loss,if any,is deductible by Kris in 2010?

Accepted Answer

Kris can only deduct the loss up to the amount of his adjusted stock basis, which is $2,300.

Question 18

On January 1,Bobby and Alice own equally all of the stock of an electing S corporation called Prairie Dirt Delight.The dirt company has a $60,000 loss for a non-leap year.On the 219th day of the year,Bobby sells his one-half of the stock to his son,Paul.How much of the $60,000 loss,if any,is allocated to Bobby?

Accepted Answer

As of the 219th day of the year, Bobby owned Prairie Dirt Delight for 219/365 or 0.6 of the year. Alice owned the other 0.4 of the year. Therefore, when the $60,000 loss is allocated to the shareholders, Bobby is allocated 0.6 x $60,000 = $36,000 of the loss. However, since Bobby sold his shares to Paul, Bobby can no longer claim his share of the loss. Therefore, Alice gets the entire loss of $60,000, and Bobby's allocation of the loss is $0. Paul's purchase of the shares occurs too late to allocate any of the loss to him for the year. So, the correct answer is B) $18,000.

Question 19

Randall owns 800 shares in Fabrication,Inc. ,an S corporation in Moss Hill,Texas.In 2010,his basis in his stock is $30,000,before the adjustment for this year's losses.During 2010,Randall's share of the corporation's ordinary loss is $20,000 and his share of its capital loss is $15,000.How much can Randall deduct due to these losses?

Accepted Answer

As Randall's basis in his stock is $30,000, his deductibility of losses is limited to this amount. His share of the corporation's total loss is $35,000 ($20,000 ordinary loss + $15,000 capital loss). Since it is less than his basis, Randall can deduct all of it. Therefore, he can deduct $17,143 ($20,000 x $30,000/$35,000) ordinary loss and $12,857 ($15,000 x $30,000/$35,000) capital loss.

Question 20

On January 2,2009,David loans his S corporation $10,000.By the end of 2009,David's stock basis is zero,and the basis in his note has been reduced to $8,000.During 2010,the company's operating income is $10,000.The company also makes distributions to David of $8,000.Which statement is correct?

Accepted Answer

The answer of On January 2,2009,David loans his S corporation...

Quiz 22: S Corporations