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Exam 11: S Corporations

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Question 71

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Assume that at the end of 2018, 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 E&P and J. D. has a basis of $50,000 in his Clampett, Inc. stock. What is J. D.'s stock basis after the distribution?

A) $45,000.
B) $50,000.
C) $85,000.
D) $90,000.
E) None of the choices are correct.

F) B) and D)
G) C) and D)

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Question 72

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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?

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The excess passive investment income...

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Question 73

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An S corporation can make a voluntary revocation of an S election if shareholders holding more than 25 percent of the S corporation stock (including nonvoting shares) agree.

Clampett, Inc. converted to an S corporation on January 1, 2018. 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 2019, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000) . Assume the corporate tax rate is 21% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2019 if it had been a C corporation. In 2020, 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 2019? In 2020?

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

Suppose at the beginning of 2018, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has directly loaned the S corporation $10,000. During 2018, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

Like partnerships and C corporations, S corporations face the same restrictions on using the cash method of accounting.

S corporations are treated in part like C corporations and in part like partnerships with respect to tax deductions for qualifying employee fringe benefits.

During 2018, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2019. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2018 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 2018 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

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%. What is Clampett, Inc.'s excess net passive income tax?

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.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. Stock on January 1, 2019, was $45,000. For 2019, 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 2019?

The estimated tax payment rules for S corporations generally follow the rules for C corporations.

Clampett, Inc. has been an S corporation since its inception. On July 15, 2019, Clampett, Inc. distributed $50,000 to J. D. His basis in his Clampett, Inc. Stock on January 1, 2019, was $30,000. For 2019, J. D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J. D. recognizes related to Clampett, Inc. in 2019?