x-1120-inst - Small Corporations

Here we will cover rules for ordinary domestic corporations. Examples of businesses taxed as corporations are businesses formed under a federal or state law that refers to it as a corporation, body corporate, or body politic, a business formed under a state law that refers to it as a joint-stock company or joint-stock association, an insurance company, certain banks and businesses owned by state or local governments.

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 You will need IRS Publication 542 to complete this topic.

Please answer the following as accurately as possible.

1. Bytes, Ltd is a partnership formed by Warren Corporation, JCL Corporation, and Mike (an individual), to build and repair personal computers. The partners' profits interest in Bytes and their respective taxable year's are stated below. Assuming there is no business purpose for any particular year and no Section 444 election has been made, determine the partnership's required taxable year.

A. Since no business purpose to establish a particular year exists, the partnership must adopt the calendar taxable year.
B. The partnership may adopt a taxable year ending either May 31 or August 31.
C. Under the required tax year rules, the partnership must adopt a taxable year ending August 31.
D. Under the required tax year rules, the partnership must adopt a calendar year.

2. Comfy Chairs Manufacturing, Ltd. Operates as a partnership and files Form 1065. Comfy manufactures inflatable lounge chairs. During tax year ended December 31, 2008, Comfy generated income and expenses as stated below. What is the correct amount of ordinary income (loss) from trade or business activities Comfy should report on Schedule K for 2008?

A. $65,000.
B. $69,500.
C. $50,000.
D. $30,000.

3. Shizaam Bakery operates as a calendar year partnership. Shizaam's two partners, Kalla and Henry share profits and losses 60% and 40%, repectively. For tax year ended December 31, 2008, Shizaam had the following income and expense:

Compute the partnership's ordinary income and flow through amounts to partners.

A. Kalla - ordinary income $85,500 and short-term capital loss $3,000; Henry - ordinary income $57,000 and short-term capital loss $2,000.
B. Kalla - ordinary income $82,500; Henry - ordinary income $55,000.
C. Kalla - ordinary income $81,000, interest income $1,500 and short-term capital loss $3,000; Henry - ordinary income $54,000, interest income $1,000 and short-term capital loss $2,000.
D. Kally - ordinary income $84,000, interest income $1,500 and short-term capital loss $3,000; Henry - ordinary income $56,000, interest income $1,000 and short-term capital loss $2,000.

4. Lori's outside basis in the Briar Patch Partnership at January 1, 2008, was $11,000. She is a 50% partner and shares profits and losses in the same ratio. For 2008, the partnership's ordinary business income was $40,000, tax-exempt interest income $200. Lori received a cash distribution from the partnership of $700 in 2008. If the partnership were to liquidate on December 31, 2008, what would be Lori's basis for determining gain or loss?

A. $24,900.
B. $30,750.
C. $30,400.
D. $30,300.

5. An S corporation can be subject to which of the following taxes:

A. Build-in gains tax.
B. Excess net passive income tax.
C. Both answer A and answer B.
D. None of the above.

6. An S corporation will be subject to Excess Net Passive Income Tax:

A. Even if it has always been an S corporation.
B. It has passive investment income for the year that is at least 20% of gross receipts.
C. Both answer A and answer B.
D. None of the above.

7. At the end of 2000, Green, Inc. was a C corporation with $50,000 in earnings and profits. Green, Inc. elected to be treated as an S corporation beginning with the 2001 year. At the end of 2008, Green, Inc. has a balance of $10,000 in its Other Adjustments Account, a balance of $20,000 in its Accumulated Adjustment Account, and a balance of $50,000 in earnings and profits, Green, Inc. made cash distributions of $25,000 to each of its 50% shareholders. Green, Inc. makes no elections relating to the source of distributions. What is the remaining Green, Inc. earnings and profits balance after the shareholder distributions?

A. $50,000.
B. $40,000.
C. $30,000.
D. $20,000.

(2553)8. Which of the following conditions will prevent a corporation from qualifying as an S corporation?

A. The corporation has both common and preferred stock.
B. The corporation has 70 shareholders.
C. One shareholder is an estate.
D. All of the above.

(SchDPart III) 9. Which of the following statements regarding the built-in gains tax of an S corporation is true?

A. The built-in gains tax is treated as a loss sustained by the corporation during the same tax year.
B. S corporation built-in gains tax can be recognized only in the 10-year period beginning with the year the S election is made.
C. S corporation built-in gains tax is passed through and paid at the shareholder level.
D. None of the above.

10. Which of the following items is NOT a separately stated item of a qualifying S corporation?

A. Interest income.
B. Charitable contributions.
C. Interest expense on business operating loans.
D. Net long term capital gain.

11. Which of the following statements regarding distributions from an S corporation is correct?

A. Property distributions are applied in a different manner that cash distributions.
B. Absent an election, distributions are considered to come first from accumulated earnings and profits, if the corporation has accumulated earnings and profits from when it was a C corporation.
C. A shareholder's right to nontaxable distributions from previously taxed income may be transferred to another person.
D. A distribution from the previously taxed income account is tax free to the extent of a shareholder's basis in his/her stock in the corporation.

12. Which of the following statements regarding the termination of an S corporation election is true?

A. The election may be revoked with the consent of shareholders who at the time the revocation is made, hold more than 50% of the number of issued and outstanding shares.
B. The election may be revoked by the board of directors of the corporation only if they are not shareholders.
C. The election terminates automatically if the corporation derives more than 25% of its gross receipts from passive investment income during the year.
D. The election may be revoked by the Internal Revenue Service if there is a history of 10 years of operating losses.

13. XYZ Corporation is a qualified S corporation. In 2008 its books and records reflected the following transactions:

What is XYZ's ordinary income (loss) to be reported on its 2008 Form 1120S?

A. $85,000.
B. $110,000.
C. $115,000.
D. $105,000.

14. Generally, all of the following entities may use the cash method of accounting, except:

A. Dealers in securities.
B. An entity with no inventories and average annual gross receipts of $5 million or less.
C. A qualified personal service corporation.
D. A corporation that has long term contracts.

15. Hinges, Inc. has a fiscal year end of June 30, 2008. What is the last date on which Hinges, Inc. can request an extension of time to file its tax return for the year ended June 30, 2008?

A. August 15, 2008.
B. September 15, 2008.
C. March 15, 2009.
D. April 15, 2009.

(2553inst)16. Regarding a corporation's election for S status, which of the following statements is correct?

A. Generally, a property completed and timely filed election for S corporation status must be made by the 15th day of the 4th month of the start of business or beginning of the entity's tax year.
B. A filed election for S status will be deemed made timely, if it is included with the corporation's initial filing of its annual report of income on Form 1120S.
C. A corporation cannot file for S status unless it has a tax year ending on December 31.
D. None of the above.

(2553inst)17. ABC corporation commenced business on July 20, 2008. What is the final at which ABC could file an election for S corporation status and be recognized as valid for the 2008 tax year?

A. September 15, 2008.
B. October 15, 2008.
C. December 31, 2008.
D. October 5, 2008.

18. If an S corporation, which has Accumulated Earnings and Profits (AE&P) is allowed to treat shareholder distributions as being made from the AE&P account how will those distributions be taxed, if at all?

A. They will be taxed as dividend income.
B. They will be taxed as ordinary earned income.
C. They will be taxed as capital gain income.
D. They will not be taxed, as it would be deemed a return of shareholder capital.

19. On December 1, 2007, Raoul, a 55% shareholder in R&B, Inc., an S corporation, elected to terminate R & B's status as an S corporation, effective on January 1, 2008. It continued to operate as a C corporation. What would be the earliest date that it could again elect S status without IRS consent?

A. January 1, 2010.
B. December 1, 2013.
C. January 1, 2014.
D. Since election to terminate S status requires 100% of the outstanding shareholders' consent, Bob cannot make the election by himself.

20. (2553) Nevertoolate Corporation was established on January 1, 2008. 100% of the shareholders elected to adopt S status for the company and properly completed IRS Form 2553. However, the company's tax accountant did not file the form. On July 1, 2008, the new accountant discovered the filing omission. Select the best available remedy for the corporation to elect S status from the following:

A. File the Form 2553, as originally prepared, on or before the end of the first tax year of the corporation.
B. Prepare a new Form 2553 and adopt a "short year" period for S status.
C. File the original Form 2553, on or before the due date of the initial return and show cause as to why the election is being filed late.
D. The company may file the prepared Form 2553, however, consent for S status will not be effective earlier than January 1, 2009.

21. On December 1, 2008, Bob elected to terminate his corporation's S status, effective January 1, 2009. Bob owns 55% of the corporation's stock. If Bob changes his mind, what is the earliest date that Bob could have his S Corporation status reinstated without IRS consent?

A. January 1, 2010.
B. December 1, 2012.
C. January 1, 2013.
D. Since election to terminate S Corporation status requires 100% of the outstanding shareholder's consent, the revocation is not valid and the S Corporation qualifies until property terminated.

22.