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Exam 22: S: Corporations

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Question 21

True/False

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Net operating losses incurred before an S election do not flow through to the shareholders once the election is in effect.

A) True
B) False

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Question 22

Multiple Choice

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Which item has no effect on an S corporation's AAA?

A) Stock purchase by a shareholder.
B) Interest expense.
C) Cost of goods sold.
D) Capital loss.
E) All of the above modify AAA.

F) A) and D)
G) B) and D)

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Question 23

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Claude Bergeron sold 1,000 shares of Ditta, Inc., an S corporation, for $12,000.He had owned the stock for three years and had a stock basis of $111,000 in the shares.Claude is single, and he is the original owner of the § 1244 stock shares.Calculate the appropriate tax treatment.

Which item does not appear on Schedule K of Form 1120S?

The § 1374 tax is a corporate-level tax on any built-in gain recognized in 2012 when an S corporation disposes of an asset in a taxable disposition within 10 tax years after the date on which the S election took effect.

You are given the following facts about a 40% owner of an S corporation, and you are asked to prepare her ending stock basis.

Milke, Inc., an S corporation, has gross receipts of $190,000 and gross income of $170,000.Milke has AEP of $22,000 and ordinary income of $29,000.The company reports passive investment income of $100,000, with $40,000 of expenses directly related to the production of passive investment income.Calculate Milke's excess net passive income and any passive investment income penalty tax.

Shareholders may deduct losses in excess of their basis in S corporation stock when a shareholder holds a loan basis of zero.

Outline the requirements that an entity must meet to elect S corporation status.

Only 80% of the shareholders must consent to an S election.

Individuals Adam and Bonnie form an S corporation, with Adam contributing cash of $100,000 for a 50% interest and Bonnie contributing appreciated ordinary income property with an adjusted basis of $20,000 and a fair market value of $100,000.

As a general rule, S corporation treatment is not advantageous when the individual tax rate far exceeds the applicable corporate tax rate.

Tax-exempt income is not separately stated on Schedule K of Form 1120S.

An S corporation shareholder's basis includes his or her direct investments plus a ratable share of any corporate liabilities.

An S corporation's separately stated items are identical to those separately stated by partnerships.

Mock Corporation converts to S corporation status in 2012.Mock used the LIFO inventory method in 2011 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 the 2011 corporate tax liability, assuming that Mock is subject to a 35% tax rate.

Any excess of S corporation losses or deductions over the shareholder's combined stock and debt basis is suspended until there is a subsequent stock or debt basis.

Which statement is incorrect with respect to filing an S election?

To make a valid S election, the entity must file a properly completed Form ____________________.

The maximum number of shareholders in an S corporation is: