R3--S Corps/ Tax exempt organization missed questions Flashcards
How are capital losses treated when a shareholder is determining their basis in an S Corp?
ALL capital losses are netted against capital gains and deducted from the basis in the stock.
Ordinary losses are limited to be deductible on a shareholders tax return. The loss is limited to the shareholders basis + Direct shareholder loans - distributions
Stahl, an individual, owns 100% of Talon, an S corporation. At the beginning of the year, Stahl's basis in Talon was $65,000. Talon reported the following items from operations during the current year: Ordinary loss $ 10,000 Municipal interest income 6,000 Long-term capital gain 4,000 Short-term capital loss 9,000 What was Stahl's basis in Talon at year-end? a. $61,000 b. $55,000 c. $50,000 d. $56,000
D. I chose A.
Stahl’s basis would be computed as follows:
Beginning basis: $65,000
+ Income 6,000 (Tax-free income increases basis)
- Loss (10,000)
- Net capital loss (5,000)
($4,000 gain netted with $9,000 loss)
=$56,000
Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Baker?
a. $0 b. $30,000 c. $5,000 d. $7,000
D. I chose B. It’s important to realize that since this S Corp was not originally a C Corp, we do not treat the distributions the same as we would a C Corp. The basis in the stock was $23,000
The taxability of distributions to shareholders in S corporations with no C corporation earnings and profits is as follows:
- To the extent of basis in stock - tax free; treated as return of capital.
- Any distributions in excess of the shareholder’s basis - taxable; treated as capital gain.
As of January 1 of the current year, Kane owned all the 100 issued shares of Manning Corp., a calendar year S corporation. On the 41st day of the year, Kane sold 25 of the Manning shares to Rodgers. For the current year ended December 31 (a 365-day calendar year), Manning had $73,000 in nonseparately stated income and made no distributions to its shareholders. What amount of nonseparately stated income from Manning should be reported on Kane’s current year tax return?
a. $0 b. $56,750 c. $16,250 d. $54,750
B. I guessed on this. It’s important to realize we need to find how much the S Corp is making per day and then allocate this amount to the amount that each shareholder has and when they have them.
The mid-year change of ownership causes Manning’s S corporation income to be allocated between the shareholders on a per-share, per-day basis. The first 40 days’ income is allocated 100% to Kane: 40 x ($73,000/365) = $8,000. 75% of the remaining 325 days’ income is allocated to Kane: 75% x 325 x ($73,000/365) = $48,750. The total income allocated to Kane is $56,750 ($8,000 + $48,750).
Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan’s basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?
a. $118,000 b. $80,000 c. $40,000 d. $38,000
B. I chose C. It’s important to understand that the income is both separately and non separately reported. Dividends, interest, & capital gains/losses are stated separately.
Like partnerships, S corporations report both separately and non-separately stated items of income and/or loss. Allocations to shareholders are made on a per-share, per-day basis in accordance with ownership percentage. Shareholders in an S corporation must include on their personal income tax return their distributive share of each separate “pass-through” item. Shareholders are taxed on these items, regardless of whether or not these items have been distributed to them during the year.
Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic’s corporate tax rate was 35%. What was Magic’s tax liability as a result of the sale?
a. $0 b. $3,500 c. $15,750 d. $19,250
C. Missed twice already! This is one example where the S Corp will be taxed because it has a built-in gain. In order to have a built in gain, two conditions must be satisfied. 1) A C corporation elects S corporation status, and (2) the fair market value of the corporate assets exceeds the adjusted basis of corporate assets on the election date.
The net unrealized built-in gain is the excess of the fair market value of corporate assets over the adjusted basis of corporate assets at the beginning of the year in which the S corporation status is elected. FMV at January 1 $ 85,000 Adjusted basis at January 1 (40,000) Excess 45,000 x 35% tax rate 35% =Corporate tax liability $ 15,750
Note: The gain to the corporation is a total of $55,000 ($95,000 - $40,000). An S corporation generally does not pay tax at the corporate level; however, in this case, there was built-in gain of $45,000 upon the election to become an S corporation, so the related C corporation tax must be paid upon the sale of the asset.
Which of the following can be an advantage of a limited liability company over an S corporation?
a. Incentive stock options can be used to compensate owners. b. Double taxation of profits is avoided. c. Owners receive limited liability protection. d. Appreciated property can be distributed tax-free to an owner.
D.
Rule: IRC Section 311 controls the taxability of corporate distributions. An S corporation (and a C corporation) recognizes a gain on any distribution of appreciated property (a property dividend) in the same manner as if the asset had been sold to the shareholder at its fair market value.
Choice “d” is correct. An S corporation cannot distribute appreciated property to its shareholders without gain. In general, a partnership can distribute appreciated property tax-free to its partners (in general, a non liquidating distribution to a partner is nontaxable). Since a limited liability company (LLC) is taxed like a partnership (an LLC properly structured and with two or more owners is taxed like a limited partnership with no general partners), a limited liability company can distribute appreciated property to its owners tax-free.
Tap, a calendar-year S corporation, reported the following items of income and expense in the current year: Revenue $ 44,000 Operating expenses 20,000 Long-term capital loss 6,000 Charitable contributions 1,000 Interest expense 4,000 What is the amount of Tap's ordinary income? a. $13,000 b. $20,000 c. $19,000 d. $24,000
B. I chose D. Interest expense is included in the separable amount because they will be affected by it.
Rule: IRC Section 1366 controls the pass-through of S corporation income items to shareholders. In general, items are divided into separately stated items (items that could potentially affect the tax liability of the shareholders) and non-separately stated items. Non-separately stated items are lumped together and constitute the S corporation’s ordinary income. Separately stated items are passed through to the shareholders (in a manner similar to partnerships) and retain their tax attributes to the shareholders.
Choice “b” is correct. Tap’s ordinary income is calculated as follows:
Revenue $ 44,000
Operating expenses (20,000)
Interest expense (4,000)
Ordinary income $ 20,000
The long-term capital loss and the charitable contributions are not included in Tap’s ordinary income. They are separately stated items and thus are passed through to the shareholders and retain their tax attributes.
For which of the following entities is the owner’s basis increased by the owner’s share of profits and decreased by the owner’s share of losses but is not affected by the entity’s bank loan increases or decreases?
a. Limited liability company. b. Partnership. c. S corporation. d. C corporation.
C. The owner’s basis in an S Corporation is increased by the owner’s share of profits and decreased by the owner’s share of losses. It is not affected by any bank loans increased or decreased by the corporation. It is only increased by direct loans made to the corporation by the owner.
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?
a. $132,000 b. $28,000 c. $188,000 d. $160,000
D.
S Corporations work in a similar fashion to partnerships. The income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson’s basis in the S Corporation stock.
Which of the following activities regularly carried out by an exempt organization will not result in unrelated business income?
a. The sale of a trade association of publications used as course materials for the association's seminars, which are oriented towards its members. b. The sale of laundry services by an exempt hospital to other hospitals. c. The sale of heavy-duty appliances to senior citizens by an exempt senior citizens center. d. Accounting and tax services performed by a local chapter of a labor union for its members.
A. I chose D. I saw the word “labor union” and thought that automatically meant it was not considered unrelated business income.
HOWEVER, the rule is: “Income from labor unions (and agricultural or horticultural organizations) used to establish a retirement home, hospital or similar exclusive use facilities.”
The organizational test to qualify a public service charitable entity as tax exempt requires the articles of organization to:
I.Limit the purpose of the entity to the charitable purpose.
II.State that an information return should be filed annually with the Internal Revenue Service.
a. Neither I nor II.
b. II only.
c. I only.
d. Both I and II.
C. I chose D. It’s important to note that not all tax-exempt organizations need to file an information return.
A computer is purchased on March 30th for $100,000. Other furniture was purchased in November for $80,000. What is the MACRS life, convention used and the depreciation amount for the computer?
5 years, mid-quarter because more than 40% of the assets were bought int he fourth quarter. Still use the first quarter thought to calculate the depreciation. $100,000 * .35
A computer was purchased for the amount of $45,000 in March year 1. No other assets were purchased that year. It was sold on Feb. 2 of year three (the current year). What is the MACRS life, convention used and the depreciation amount for the computer (in the current year)?
MACRS 5 year. Half life convention. $4,320.
The half life convention is only built into the table at the year of purchase, so when determining depreciation on the year of sale, we have to divide the percentage amount by 1/2 before multiplying.
45,000 * 9.6%
An accrual basis C Corporation has a preliminary taxable loss of $40,000 without $5,000 charitable contributions or $10,000 in dividends received from a 15% owned domestic corporation. What is the amount of taxable income (loss) in line 30 on the Form 1120?
($37,000) The charitable contribution deduction is the lesser of the amount of the charitable contribution OR 10% of taxable income. However, you can’t take a charitable contribution when the taxable income is negative. The DRD is calculated without regard to the NOL deduction, any capital loss carrybacks and the domestic production activities deduction. It does take into account the charitable contributions, but in this case we don’t have any.
(40,000) + 10,000 - 7,000=(37,000)
