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Exam 11: S Corporations

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Question 51

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SEC Corporation has been operating as a C corporation since 2014.It elected to become an S corporation,effective January 1,2017.On December 31,2016,SEC reported a net unrealized built in gain of $10,000.In addition to other transactions in 2017,SEC sold inventory it owned at the beginning of 2017 (it did not sell any other assets it owned at the beginning of 2017).At the beginning of the year,the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000.SEC sold the inventory for $28,000.If SEC had been a C corporation in 2017,its taxable income would have been $40,000.How much built-in gains tax must SEC pay in 2017?

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It must pay $3,500 ($10,000 × 35%)in bui...

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Question 52

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Separately stated items are tax items that are treated similarly for tax purposes as a shareholder's share of ordinary business income (loss).

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Question 53

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

Suppose Clampett,Inc.terminated its S election on August 28,2017.At the end of the S corporation's short tax year ending on August 28,J.D.'s stock basis and at-risk amounts were both zero (he has never had debt basis) ,and he had a suspended loss of $20,000.In 2018,J.D.made additional capital contributions of $5,000 on March 15 and $12,000 on September 5.How much loss may J.D.deduct in 2018?

Jackson is the sole owner of JJJ corp.(an S corporation).At the end of 2017,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 31,2017.If Jackson contributes $6,000 cash to JJJ on July 1,2018 and $3,000 cash on January 5,2019,how much of his $10,000 suspended loss will he be allowed to deduct and how much disappears unused?

Clampett,Inc.converted to an S corporation on January 1,2017.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 2018,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 2018 if it had been a C corporation.In 2019,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 2018? In 2019?

Clampett,Inc.has been an S corporation since its inception.On July 15,2018,Clampett,Inc.distributed $50,000 to J.D.His basis in his Clampett,Inc.stock on January 1,2018,was $30,000.For 2018,J.D.was allocated $10,000 of ordinary income from Clampett,Inc.and no separately stated items.What is J.D.'s basis in his Clampett,Inc.stock after all transactions in 2018?

Which of the following would not result in an S election termination?

Which of the following statements is correct?

Maria,a resident of Mexico City,Mexico,formed MZE Corp.in Mexico under Mexican law but planned to do business in the United States.Is MZE eligible to elect S corporation status in the United States? Explain.

During 2017,CDE Corporation (an S corporation since its inception in 2015)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?

XYZ was formed as a calendar-year S corporation with Xavier,Yolinda,and Zach as equal shareholders.On September 15,2017,XYZ's S election was terminated after Zach sold his XYZ shares (one-third of all shares)to his solely owned C Corporation Zach,Inc.Absent permission from the IRS,what is the earliest date XYZ may again elect to be taxed as an S corporation?

Regarding debt,S corporation shareholders are deemed at risk only for direct loans they make to their S corporation.

During 2017,MVC operated as a C corporation.However,it made an election to be taxed as an S corporation effective January 1,2018.MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory.At the end of 2017 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 2017 was $80,000.What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

At the beginning of the year,Clampett,Inc.had $100,000 in its AAA,$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% of Clampett,Inc.,his basis in Clampett,Inc.at the beginning of the year is $30,000,and his share of the distribution was $50,000.What is J.D.'s basis in the Clampett,Inc.stock after these transactions?

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

Clampett,Inc.converted to an S corporation on January 1,2017.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 2018,Clampett,Inc.sells its entire inventory for $60,000 (Basis $30,000) .Assuming the corporate tax rate is 35%.Clampett,Inc.'s taxable income in 2018 would have been $1,000,000 if it had been a C corporation.How much built-in gains tax does Clampett,Inc.pay in 2018?

The same exact requirements for forming and contributing property govern S corporations and partnerships.

Which of the following is prohibited from being an S corporation shareholder?

Publicly traded corporations cannot be treated as S corporations.