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Exam 22: S Corporations

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Question 1

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You are given the following facts about a 50% owner of an S corporation. Compute her ending stock basis. $\begin{array} { l r } \text { Increase in AAA } & \$ 32,000 \\\text { Increase in OAA } & 6,300 \\\text { Payroll tax penalty } & 2,140 \\\text { Owner's beginning stock basis } & 39,800 \\\text { Tax-exempt interest income } & 4,800 \\\text { Insurance premiums paid (nondeductible) } & 2,700 \\\text { Owner's additional stock purchases } & 22,000 \\\text { Owner's 20\% QBI deduction } & 21,000\end{array}$

A) $80,950.
B) $85,750.
C) $100,100.
D) $106,225.

E) A) and B)
F) A) and C)

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Question 2

Multiple Choice

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Which corporation is eligible to make the S election?

A) Non-U.S. corporation.
B) One-person limited liability company.
C) Insurance company.
D) U.S. bank.
E) None of these.

F) B) and D)
G) None of the above

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Question 3

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Separately stated items are listed on Schedule of the Form 1120S.

The passive investment income of an S corporation includes gains from the sale of securities.

What method is used to allocate S corporation income or losses (unless an election to the contrary is made) ?

If an S corporation's beginning balance in OAA is zero and the following transactions occur, what is the ending OAA balance? $\begin{array}{lr}\text { Depreciation recapture income } & \$ 21,000 \\\text { Payroll tax penalty } & 4,200 \\\text { Tax -ex empt interest income } & 5,300 \\\text { Nontax able life insurance proceeds } & 5,100 \\\text { Life insurance premiums paid (nondeductible) } & 2,800\end{array}$

Mock Corporation converts to S corporation status in 2020. Mock used the LIFO inventory method in 2019 and had a LIFO inventory of $435,000 (FIFO value of $550,000) on the date of the S election. How much tax must be added to Mock's 2019 corporate tax liability, assuming that Mock is subject to a 21% tax rate.

There are no advantages for an S corporation to issue § 1244 stock.

Kinney, Inc., an electing S corporation, holds $5,000 of AEP and $9,000 in AAA at the beginning of the calendar tax year. Kinney has two shareholders, Eric and Maria, each of whom owns 500 shares of Kinney's stock. Kinney's taxable income is $6,000 for the year. Kinney distributes $6,000 to each shareholder on February 1, and it distributes another $3,000 to each shareholder on September 1. How is Eric taxed on the distribution?

If an S corporation has C corporation E & P and passive investment income in excess of % of its gross receipts for consecutive taxable years, the S election is terminated at the beginning of the year.

The exclusion of gain on disposition of small business stock is not available on disposition of S corporation stock.

Towne, Inc., a calendar year S corporation, holds AAA of $627,050 at the beginning of the tax year. During the year, the following items occur. $\begin{array}{lc}\text { Sales income } & \$ 216,000 \\\text { Loss from real estate operations } & (4,000) \\\text { Officers' life insurance proceeds } & 100,000 \\\text { Premiums paid for officers' life insurance } & (3,600) \\\text { Dividend income } & 17,000 \\\text { Interest income } & 3,000 \\\text { Charitable contributions } & (22,000) \\\S 179 \text { depreciation expense } & (2,500) \\\text { Administrative expenses } & (35,000) \\\text { Cash distributions to shareholders } & (73,220)\end{array}$ Calculate Towne's ending AAA balance.

This year, Jiang, the sole shareholder of a calendar year S corporation, received a distribution of $17,000. On December 31 of the prior year, his stock basis was $3,000. The corporation earned $12,000 ordinary income during the year. It has no accumulated E&P. Which statement is correct? Ignore the 20% QBI deduction.

Some ____________________and taxation rules apply to an S corporation.

During the year, Miles Nutt, the sole shareholder of a calendar year S corporation, received a distribution of $16,000. At the end of last year, his stock basis was $4,000. The corporation earned $11,000 ordinary income during the year. It has no accumulated E & P. Which statement is correct?

On December 31, Erica Sumners owns one share of an S corporation's 10 outstanding shares of stock. The basis of Erica's share is $300. The next year, the S corporation incurs a loss of $3,650. Determine the amount of the loss allocated to Erica, and calculate her stock basis at the end of the second year.

NOL carryforwards from C years can be used in an S corporation year against ordinary income.

An S corporation can claim a deduction for its operating loss amounts.

The corporate-level tax on recognized built-in gains applies when an S corporation disposes of an asset in a taxable disposition within five years after the date on which the S election took effect.

An S shareholder's basis is increased by stock purchases and capital contributions.