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Exam 22: S Corporations

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Question 41

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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 these.

F) All of the above
G) None of the above

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Question 42

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During 2013, MVC operated as a C corporation. However, it made an election to be taxed as an S corporation effective January 1, 2014. MVC uses the accrual method of accounting and uses the LIFO method of accounting for its inventory. At the end of 2013 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 2013 was $80,000. What amount of LIFO recapture tax must MVC pay? When must it pay the tax?

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MVC must pay $2,380 [($70,000 FIFO inven...

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Question 43

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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).

Lamont is a 100% owner of JKL Corporation. JKL has been an S corporation since its inception in 2014. During 2016, JKL distributed $20,000 to Lamont. During 2016, JKL reported $5,000 of business income and no separately stated items. What is the amount and character of the gain, if any, Lamont must recognize in each of the following alternative scenarios? Also, what is Lamont's stock basis at the end of 2016 in each of the following scenarios? a. Lamont's stock basis at the beginning of the year was $30,000. b. Lamont's stock basis at the beginning of the year was $4,000.

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

In general, an S corporation shareholder makes increasing adjustments to her basis first, followed by adjustments that decrease basis.

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

Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent.

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

The IRS may consent to an early re-election of S corporation status after a termination under which of the following:

Which of the following is a requirement to be an S corporation?

An S corporation shareholder's allocable share of business income that is a passive activity is considered net investment income for purposes of the Net Investment Income tax.

MWC is a C corporation that uses the accrual method of accounting. MWC made an S election, effective January, 1 of 2014. The following assets were owned by MWC on December 31, 2013. $\begin{array} { | l | r | r | } \hline { \text { Asset } } & \begin{array} { c } \text { Fair Market } \\\text { Value (FMV) }\end{array} & \begin{array} { c } \text { Adjusted basis } \\\text { (AB) }\end{array} \\\hline \text { Cash } & \$ 40,000 & \$ 40,000 \\\hline \text { Accounts receivable } & 15,000 & 15,000 \\\hline \text { Inventory (FIFO) } & 20,000 & 25,000 \\\hline \text { Land } & \underline { 125,000 } & \underline { 100,000 } \\\hline \text { Totals } & \$ 200,000 & \$ 180,000 \\\hline\end{array}$ What is MWC's net unrealized built-in gain when it converts to an S corporation on January 1, 2014?

CB Corporation was formed as a calendar-year S corporation. Casey is a 60% shareholder and Bryant is a 40% shareholder. On September 30, 2014, Bryant sold his CB shares to Don. CB reported business income for 2014 as follows (assume that there are 365 days in the year): $\begin{array} { | l | r | } \hline { \text { Period } } & { \text { Income } } \\\hline \text { January } 1 \text { through September } 30 \text { (273 days) } & \$ 200,000 \\\hline \text { October } 1 \text { through December } 31 \text { (92 days } ) & 530,000 \\\hline \text { January } 1 \text { through December } 31 & \$ 730,000 \\\hline\end{array}$ How much 2014 income is allocated to each shareholder if CB uses its normal accounting rules to allocate income to the specific periods in which it was actually earned?

An S corporation may be voluntarily or involuntarily terminated.

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

RGD Corporation was a C corporation from its inception in 2010 through 2013. However, it elected S corporation status effective January 1, 2014. RGD had $50,000 of earnings and profits at the end of 2013. RGD reported the following information for its 2014 tax year. $\begin{array} { | l | r | } \hline \text { Description } & \text { Amount } \\\hline \text { Consulting revenue } & \mathbf { \$ 9 9 , 0 0 0 } \\\hline \text { Salary to owners } & ( 40,000 ) \\\hline \text { Employee wages } & ( 30,000 ) \\\hline \text { Depreciation expense } & ( 5,000 ) \\\hline \text { Municipal bond interest } & 6,000 \\\hline \text { Interest income } & 42,000 \\\hline \text { Dividend income } & \underline { 25,000 } \\\hline \text { Overall net income } & \mathbf { \$ 9 7 , 0 0 0 } \\\hline\end{array}$ What amount of excess net passive income tax is RGD liable for in 2014? (Round your answer for excess net passive income to the nearest thousand).

S corporations offer the same legal protection to owners as C corporations.

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

XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2014, 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?