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Exam 17: S Corporations

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Question 31

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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.

A) True
B) False

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Question 32

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When an S corporation distributes appreciated property to all of its shareholders pro rata, the shareholders who receive the distributed property recognize income on their distributive share of the deemed gain.

A) True
B) False

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Question 33

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

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

During 2019, CDE Corporation (an S corporation since its inception in 2017)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?

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?

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. $\begin{array} { l c r } & \text { Description } & \text { Amount } \\\text { Consulting revenue } && \$130,000 \\\text { Salary to owners } && ( 50,000 ) \\\text { Employee wages } && (40,000 ) \\\text { Depreciation expense }& & ( 8,000 ) \\\text { Interest income } && 50,000 \\\text { Dividend income } & &\underline{40,000 }\\ \text { Overall net income } &&\underline{ \$ 122,000} \\\end{array}$ 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.)

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:

S corporations without earnings and profits from prior C corporation years are not subject to the excess net passive income tax.

Maria resides in San Antonio, Texas.She formed MZE Corporation under the state laws of Texas.Maria anticipates that she will conduct her business activities in both Mexico and the United States.Is MZE eligible to elect S corporation status? Explain.

Which of the following income items from an S corporation is not considered investment income for purposes of the net investment income tax?

An S corporation election may be voluntarily or involuntarily terminated.

MWC is a C corporation that uses the accrual method of accounting.MWC made an S election, effective January 1 of 2019.The following assets were owned by MWC on December 31, 2018. $\begin{array}{lccc} &\text { Fair Market } & \\& \text { Value } & \text { Adjusted } \\ \quad\quad\quad\quad\quad\text { Asset } & \text { (FMV) } & \text { basis (AB) } \\\text { Cash } & \$ 40,000 & \$ 40,000 \\\text { Accounts receivable } & 15,000 & 15,000 \\\text { Inventory (FIFO) } & 20,000 & 25,000 \\\text { Land } & \underline{ 125,000 }& \underline{100,000} \\\text { Total } & \$ 200,000 & \$ 180,000 \\\hline\end{array}$ What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2019?

Which of the following is not considered a family member for purposes of the S corporation shareholder limit test?

S corporations are not entitled to a dividends received deduction.

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., has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 21 percent.Clampett, Inc.'s taxable income would have been $122,000 this year if it had been a C corporation.What is Clampett, Inc.'s excess net passive income tax?

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

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year.Assuming no special elections, SoTired, Inc., will continue to use a June 30 year-end as an S corporation.

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

During 2019, CDE Corporation (an S corporation since its inception in 2017)liquidates 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?