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Exam 22: S Corporations

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Question 1

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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?

A) $10,500.
B) $10,000.
C) $3,500.
D) $0.
E) None of these.

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

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Question 2

Multiple Choice

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Which of the following income items from an S corporation is not considered investment income for purposes of the Net Investment Income tax?

A) Passive income.
B) Interest income.
C) Dividends.
D) Short-term capital gains.
E) All of these are considered investment income for the Net Investment Income tax.

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

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Question 3

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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 28 and a total of $1,460,000 from January 1 through December 31 (365 days) ?

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?

The S corporation rules are less complex for S corporations that have earnings and profits from prior C corporation years than for S corporations that do not have earnings and profits from prior C corporation years.

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

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. $\begin{array} { | l | r | } \hline \text { Description } & \text { Amount } \\\hline \text { Consulting revenue } & \$ 120,000 \\\hline \text { Salary to owners } & ( 50,000 ) \\\hline \text { Employee wages } & ( 40,000 ) \\\hline \text { Depreciation expense } & ( 8,000 ) \\\hline \text { Long-term capital gain } & 10,000 \\\hline \text { Interest income } & 50,000 \\\hline \text { Dividend income } & \underline { 40,000 } \\\hline \text { Overall net income } & \mathbf { \$ 1 2 2 , 0 0 0 } \\\hline\end{array}$ 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 generally recognize gain or loss on each asset they distribute in liquidation.

Which of the following is not considered a family member for purposes of the S corporation shareholder limit?

Which of the following is not an adjustment to an S corporation shareholder's stock basis?

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.

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?

Publicly traded corporations cannot be treated as S corporations.

Hazel is the sole shareholder of Maple Corp. In 2014 Maple operated as a C corporation and reported $15,000 of taxable income (and earnings and profits). In 2014, Maple elected S corporation status. During 2015 Maple reported $12,000 of ordinary business income and no separately stated items. It also distributed $25,000 to Hazel. What is the amount and character of income Hazel must recognize on the distribution? What is Hazel's stock basis at the end of 2015 (after accounting for the distribution) if her basis at the beginning of the year was $5,000?

An S corporation shareholder calculates his initial basis upon formation of the corporation like C corporation shareholders.

Which of the following would not result in an S election termination?

For an S corporation shareholder to deduct it, a loss must clear three separate hurdles: (1) tax basis, (2) at-risk amount, and (3) tax-shelter rules.

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. What is Clampett, Inc.'s excess net passive income?

Suppose at the beginning of 2014, Jamaal's basis in his S corporation stock is $0, he has a $0 debt basis associated with a $10,000 loan he made to the S corporation and a $5,000 suspended loss from the S corporation. In 2014, Jamaal contributed $8,000 to the S corporation, and the S corporation had ordinary income of $4,000. Assume that Jamaal owns 40% of the S corporation. What is Jamaal's stock and debt basis at the end of 2014?

After terminating or voluntarily revoking S corporation status, a corporation may elect it again, but it generally must wait until the beginning of the third tax year after the tax year in which it terminated the election.