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Exam 22: S Corporations

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Question 31

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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?

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MVC must pay $1,470 [($70,000 FIFO inven...

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Question 32

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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) . Assuming the corporate tax rate is 21%. Clampett, Inc.'s taxable income in 2019 would have been $1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2019?

A) $10,500.
B) $10,000.
C) $2,100.
D) $0.
E) None of the choices are correct.

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

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Question 33

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RGD Corporation was a C corporation from its inception in 2014 through 2017. However, it elected S corporation status effective January 1, 2018. RGD had $50,000 of earnings and profits at the end of 2017. RGD reported the following information for its 2018 tax year. What amount of excess net passive income tax is RGD liable for in 2018? (Round your answer for excess net passive income to the nearest thousand).

At the beginning of the year, Clampett, Inc. had $100,000 in its AAA, $60,000 of earnings and profits from prior C corporation years. During the year, Clampett, Inc. earned $50,000 of ordinary income and paid $200,000 in distributions to its shareholders. Assume that J. D. owns 25% of Clampett, Inc., his basis in Clampett, Inc. at the beginning of the year is $30,000, and his share of the distribution was $50,000. How much, if any, of the distribution is taxable as a dividend?

Built-in gains recognized fifteen years after a C corporation elects to become an S corporation are subject to the built-in gains tax.

During 2018, CDE Corporation (an S corporation since its inception in 2016) distributed a parcel of land to its sole shareholder Clark. The fair market value of the land at the time of the distribution was $80,000 and CDE's tax basis in the property was $30,000. Before considering the effects of the distribution, Clark's basis in his CDE stock was $10,000. What amount of gain, if any, does CDE recognize on the distribution? What amount of income, if any, does Clark recognize on the distribution and what is Clark's basis in his CDE stock after accounting for the distribution?

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

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

S corporation shareholders are not allowed to include any S corporation-level debt in their stock basis.

S corporations have considerable flexibility in making special profit and loss allocations of operating income.

Parker is a 100% shareholder of Johnson Corp. (an S corporation). At the beginning of 2018, Parker's basis in his Johnson Corp. stock was $14,000. During 2018, Parker loaned $20,000 to Johnson Corp. and Johnson Corp. reported a $25,000 ordinary business loss and no separately stated items. In 2019, 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 2018? b. What is Parker's stock and debt basis at the end of 2018? c. What is Parker's stock and debt basis at the end of 2019?

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.

To make an S election effective as of the beginning of the current year, an S corporation must file IRS Form 2553 within 3½ months after the beginning of the year.

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

XYZ was formed as a calendar-year S corporation with Xavier, Yolinda, and Zach as equal shareholders. On September 15, 2018, 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?

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

Maria, a resident of Mexico City, Mexico, formed MZE Corp. in Mexico under Mexican law but planned to do business in the United States. Is MZE eligible to elect S corporation status in the United States? Explain.

Assume Joe Harry sells his 25% interest in Joe's S Corp., Inc. to Tyrone on January 29. Using the daily allocation method, how much income does Joe Harry report if Joe's S Corp., Inc. earned $200,000 from January 1 to January 29 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

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

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