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Exam 22: S Corporations

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Question 21

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Maria resides in San Antonio, Texas. She formed MZE Corporation under the state laws of Texas. Maria anticipates that she will conduct her business activities in both Mexico and the United States. Is MZE eligible to elect S corporation status? Explain.

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Question 22

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Which of the following is not a separately stated item for S corporations?

A) Dividends.
B) Interest income.
C) Charitable contributions.
D) Investment interest expense.
E) All of these are separately stated items.

F) A) and C)
G) B) and C)

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Question 23

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An S corporation shareholder's allocable share of ordinary business income (loss) is classified as self-employment income for tax purposes.

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) . Assuming the corporate tax rate is 35% and that Clampett, Inc. had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc. pay in 2015?

An S corporation may be voluntarily or involuntarily terminated.

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

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

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

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

SoTired, Inc., a C corporation with a June 30 year-end, elects S corporation status this year. Assuming no special elections, SoTired, Inc. will continue to use a June 30 year-end as an S corporation.

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 corporations may have no more than 50 shareholders, but members of the same family only count as one shareholder.

Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2014, Parker's basis in his Johnson Corp. stock was $14,000. During 2014, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2015, Johnson Corp. reported $8,000 of ordinary business income. a. How much of the $25,000 ordinary loss allocated to Parker clears the tax basis hurdle for deductibility in 2014? b. What is Parker's stock and debt basis at the end of 2014? c. What is Parker's stock and debt basis at the end of 2015?

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

SEC Corporation has been operating as a C corporation since 2011. It elected to become an S corporation, effective January 1, 2014. On December 31, 2013, SEC reported a net unrealized built in gain of $60,000. In addition to other transactions in 2014, SEC sold inventory it owned at the beginning of 2014 (it did not sell any other assets it owned at the beginning of 2014). At the beginning of the year, the inventory it sold had a fair market value of $30,000 and a FIFO tax basis of $10,000. SEC sold the inventory for $35,000. If SEC had been a C corporation in 2014, its taxable income would have been $100,000. How much built-in gains tax must SEC pay in 2014?

The built-in gains tax does not apply to S corporations that never operated as C corporations.

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.

Clampett, Inc. (an S corporation) previously operated as a C corporation. Distributions from Clampett, Inc. are deemed to be paid in the following order:

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. has $1,000 of earnings and profits from prior C corporation years and that the corporate tax rate is 35%. What is Clampett, Inc.'s excess net passive income tax?