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Exam 22: S Corporations

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Question 31

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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.

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Yes.
Jace Corp. may not make an S electi...

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Question 32

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Which of the following statements is correct regarding S corporation estimated taxes?

A) S corporations never pay estimated taxes.
B) S corporations with a federal income tax liability of $500 due to the built-in gains tax or excess net passive income tax must pay estimated taxes.
C) S corporations that owe $5,000 in LIFO recapture tax only must pay estimated taxes.
D) S corporations with a federal income tax liability of $100 due to the excess net passive income tax must pay estimated taxes.
E) None of these.

F) B) and E)
G) B) and D)

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Question 33

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S corporations have considerable flexibility in making special profit and loss allocations.

S corporations are not entitled to a dividends received deduction.

Jackson is the sole owner of JJJ corp. (an S corporation). At the end of 2014, Jackson's basis in his JJJ stock and his at risk amount was $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, 2014. If Jackson contributes $6,000 cash to JJJ on July 1, 2015 and $3,000 cash on January 5, 2016, how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

S corporation distributions are not taxable to the extent of stock and debt basis.

For S corporations with earnings and profits from prior C corporation years, the taxation of distributions is very similar to the rules for partnerships.

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

XYZ Corporation (an S corporation) is owned by Jane and Rebecca who are each 50% shareholders. At the beginning of the year, Jane's basis in her XYZ stock was $40,000. XYZ reported the following tax information for 2014. $\begin{array} { | l | r | } \hline \text { Description } & { \text { Amount } } \\\hline \text { Sales revenue } & \$ 730,000 \\\hline \text { Cost of goods sold } & ( 200,000 ) \\\hline \text { Long-term capital gain } & 8,000 \\\hline \text { Dividend income } & 5,000 \\\hline \text { Tax exempt interest } & 3,000 \\\hline \text { Salary to owners } & ( 120,000 ) \\\hline \text { Employee wages } & ( 50,000 ) \\\hline \text { Depreciation expense } & ( 12,000 ) \\\hline \text { Miscellaneous expenses } & ( 10,000 ) \\\hline \text { Overall net income } & \$ 354,000 \\\hline\end{array}$ 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 corp. stock at the end of the year?

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.

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? $\begin{array} { | c | c | c | c | } \hline \text { Year } & \begin{array} { c } \text { Gross Receipts } \\\text { (including passive } \\\text { investment income) }\end{array} & \begin{array} { c } \text { Passive } \\\text { investment income }\end{array} & \begin{array} { c } \text { Corporate } \\\text { Earnings and Profits } \\\text { (end of year) }\end{array} \\\hline 2014 & \$ 400,000 & \$ 120,000 & \$ 140,000 \\\hline 2015 & \$ 300,000 & \$ 70,000 & \$ 100,000 \\\hline 2016 & \$ 500,000 & \$ 130,000 & \$ 70,000 \\\hline 2017 & \$ 400,000 & \$ 110,000 & \$ 40,000 \\\hline 2018 & \$ 600,000 & \$ 155,000 & \$ 1,000 \\\hline\end{array}$

At the beginning of the year, Harold, Missy, and Ranae formed HMR Corporation as an S corporation. For one-third of the HMR stock, Harold contributed $50,000 cash and land with a fair market value of $75,000 and adjusted tax basis of $60,000. The land was subject to a $45,000 mortgage, which was assumed by HMR on the formation. Missy and Ranae each contributed $80,000 cash to HMR for one-third of the HMR stock. What is Harold's basis in the HMR stock after the formation? What is Missy's basis in her HMR stock after the formation?

Which of the following S corporations would be subject to the excess net passive income tax?

Clampett, Inc. converted to an S corporation on January 1, 2014. 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) . What is Clampett, Inc.'s built-in gain or loss on January 1, 2014?

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?

S corporations recognize gains and losses on distributions of property.

During the post-termination transition period, property distributions are tax-free to shareholders to the extent they do not exceed the corporation's AAA balance and the individual shareholder's basis in the stock.

Clampett, Inc. converted to an S corporation on January 1, 2014. 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 2015, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000) . Assume the corporate tax rate is 35% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2015 if it had been a C corporation. In 2016, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2015? In 2016?

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?