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Exam 11: S Corporations

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Question 61

True/False

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An S corporation shareholder's allocable share of business income that is determined to be from a passive activity is considered net investment income for purposes of the net investment income tax.

A) True
B) False

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Question 62

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Which of the following statements is correct?

A) The LIFO recapture tax precludes an S corporation from using the LIFO method.
B) The LIFO recapture tax is paid in five annual installments.
C) The LIFO recapture amount increases the corporation's adjusted basis in its inventory.
D) The LIFO recapture tax does not apply to S corporations with no earnings and profits from prior C corporation years.
E) None of the choices are correct.

F) B) and D)
G) A) and B)

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Question 63

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For S corporations without earnings and profits from prior C corporation years, the taxation of cash distributions to the shareholder is governed by rules very similar to the rules for partnerships.

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

Bobby T (95 percent owner) would like to elect S corporation status for DJ, Inc., but Dallas (5 percent owner) does not want to elect S corporation status. Bobby T cannot elect S status for DJ, Inc., without Dallas's consent.

Which of the following is the correct order in which loss limitation rules are applied?

Assume that at the end of 2019, Clampett, Inc. (an S corporation) distributes property (fair market value of $40,000, basis of $5,000) to each of its four equal shareholders (aggregate distribution of $160,000) . At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D. has a basis of $50,000 in his Clampett, Inc., stock. How much income does J.D. recognize as a result of the distribution?

Jackson is the sole owner of JJJ Corp. (an S corporation). At the end of 2019, Jackson's basis in his JJJ stock and his at-risk amount were $0. Jackson also had a $10,000 suspended ordinary business loss (suspended at the tax-basis and at-risk level). JJJ's S election was terminated effective the end of the day on December 31, 2019. If Jackson contributes $6,000 cash to JJJ on July 1, 2020, and $3,000 cash on January 5, 2021, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

RGD Corporation was a C corporation from its inception in 2015 through 2018. However, it elected S corporation status effective January 1, 2019. RGD had $50,000 of earnings and profits at the end of 2018. RGD reported the following information for its 2019 tax year. What amount of excess net passive income tax is RGD liable for in 2019? (Round your answer for excess net passive income to the nearest thousand.)

Assume Joe Harry sells his 25 percent 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 29 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within three and a half months after the beginning of the year.

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?

At the beginning of the year, Clampett, Inc., had $100,000 in its AAA and $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc., earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J.D. owns 25 percent of Clampett, Inc., his basis in Clampett, Inc., at the beginning of the year is $10,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a capital gain?

The IRS may consent to an early reelection of S corporation status after a termination under which of the following?

Clampett, Inc., converted to an S corporation on January 1, 2019. At that time, Clampett, Inc., had cash ($40,000) , inventory (FMV $60,000, basis $30,000) , accounts receivable (FMV $40,000, basis $40,000) , and equipment (FMV $60,000, basis $80,000) . In 2020, Clampett, Inc., sells its entire inventory for $60,000 (basis $30,000) . Assume the corporate tax rate is 21 percent and that Clampett, Inc., had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc., pay in 2020?

Parker is a 100 percent shareholder of Johnson Corp. (an S corporation). At the beginning of 2019, Parker's basis in his Johnson Corp. stock was $14,000. During 2019, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2020, Johnson Corp. reported $8,000 of ordinary business income. a. How much of the $25,000 ordinary loss allocated to Parker clears the tax-basis hurdle for deductibility in 2019? b. What is Parker's stock and debt basis at the end of 2019? c. What is Parker's stock and debt basis at the end of 2020?

Assume that at the end of 2019, Clampett, Inc. (an S corporation) distributes long-term capital gain property (fair market value of $40,000, basis of $25,000) to each of its four equal shareholders (aggregate distribution of $160,000) . At the time of the distribution, Clampett, Inc., has no corporate earnings and profits and J.D. has a basis of $15,000 in his Clampett, Inc., stock. How much income does J.D. recognize as a result of the distribution?

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 $63,000. If MVC had used the FIFO method of accounting for its inventory, it would have had a $70,000 basis in its inventory. Finally, MVC's regular taxable income in 2019 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

An S corporation election may be voluntarily or involuntarily terminated.

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?