Chapter 21 S Corporations – MCQs

Chapter 21 S Corporations TRUE-FALSE QUESTIONS—CHAPTER 21 1. To qualify as an S corporation there is no limit to the number of shareholders. 2. A corporation with more than 50 shareholders will not qualify for the S election. 3. Ace Trucking Co., Inc. is chartered in Michigan. It has 100 shares of common stock and 200 shares of preferred stock outstanding which are held by three individuals who also live in Michigan. The corporation owns no subsidiaries. This corporation qualifies for the S election. 4. A corporation with two classes of stock cannot qualify under Subchapter S for the election not to be taxed. 5. If a corporation fails to make a timely S election, an extension of time to make the election may be granted. 6. A calendar year corporation that meets certain requirements and wishes not to be taxed as a corporation for 2013 must make an S election by March 15, 2013. 7. An S corporation cannot be subject to an income tax. 8. An electing S corporation is entitled to the dividends received deduction. 9. A shareholder’s stock basis in an S corporation is increased by his or her share of the corporation’s separately stated and non-separately computed items of income. 10. If a shareholder of an S corporation has a tax year different from that of the corporation, he or she must report any distributions of current year’s taxable income in the year he or she actually receives the distribution. 11. Any incorporated business can elect to be taxed as an S corporation. 12. Since S corporations are corporations, they are subject to the accumulated earnings tax, personal holding company tax, and alternative minimum tax. 13. A corporation cannot elect S status if it has as a shareholder a corporation or partnership. 14. A corporation that wants to elect and retain S corporation status can at no time have 100 shareholders. 15. All members of the same family are treated as one shareholder in an S corporation. 16. A corporation cannot qualify as an S corporation if it has more than one class of stock. 17. A corporation eligible to be an S corporation is automatically treated as such by the IRS.18. A corporation’s S status can only be terminated by having all shareholders revoke the S election. 19. Once filed, an S corporation cannot rescind a revocation. MULTIPLE CHOICE QUESTIONS—CHAPTER 21 20. Who pays tax on the income of an S corporation? a. The S corporation b. The shareholders c. The customers d. There is no tax imposed on S corporation income 21. What is the maximum number of shareholders that an S corporation may have? a. 10 b. 25 c. 35 d. 100 e. None of the above 22. Which of the following is not an eligible shareholder for an S corporation? a. Nonresident alien b. Qualified Subchapter S Trust c. An estate d. None of the above 23. Which type of stock will disqualify a corporation from becoming an S corporation? a. One class of stock but with different voting rights b. A straight debt instrument c. Stock which has preference in dividends d. None of the above 24. Which corporation will qualify for S corporation status?a. Corporation owning a subsidiary b. DISC corporation c. Possession corporation d. None of the above 25. Which tax year is not allowed an S corporation? a. Calendar year b. Fiscal year established by business purpose c. Fiscal year that is the same as all the principal owners d. None of the above 26. What is Gerald Germain’s basis in an S corporation assuming he is the sole shareholder and his capital account has a balance of $15,000, the corporation has $5,000 in liabilities, $2,000 in previously taxed income, and $1,000 in accumulated earnings and profits? a. $23,000 b. $22,000 c. $18,000 d. $17,000 e. None of the above e. Business energy credits 27 Passive investment income includes all except: a. Interest b. Sales or exchanges of stock or securities c. Rents d. Interest on deferred payment sales of property held for sale to customers 28. S corporation corporate level elections include all except: a. S election and/or change of accounting methodb. Election out of the installment sales provision c. Deduction and recapture of certain mining exploration expenses d. Inventory valuation 29. Which of the following is not a separately stated item in the income computation of an S corporation? a. Long-term capital gain b. Charitable contributions c. Interest income d. Section 179 expense e. General business credit 30. Which of the following would not increase the basis of a shareholder’s stock in an S corporation: a. All separately stated income items of the S corporation, including tax-exempt income. b. Any nonseparately stated income of the S corporation. c. Capital gains tax paid by the shareholder. d. The amount of deductions for depletion that is more than the basis of the property being depleted. 31. On 1-1-X1, Mr. Vear purchased 50 percent of S Corporation Z’s only class of stock outstanding for $100,000. On 12-1-X1, he purchased the other 50 percent of its stock. For 20X1, Z Corporation had a net operating loss of $255,500. How much of the loss can Mr. Vear deduct on his individual income tax return for 20X1? a. $138,600 b. $200,000 c. $234,208 d. $255,500 32. Advantages of an S corporation include: a. limited liability.b. single level of taxation. c. not subject to the personal holding company tax. d. All of the above. e. None of the above. 33. Which of the following is not a requirement of a “small business corporation?” a. It must be a domestic corporation. b. It can never have more than 100 shareholders. c. It must use the reserve method of accounting. d. It can only have one class of stock. 34. All of the following are permitted shareholders of an S corporation except: a. estates. b. eligible trusts. c. nonresident aliens. d. certain tax-exempt organizations. 35. An S corporation’s separately stated items must include all of the following except: a. gross income from business operations. b. tax credits. c. investment income expense. d. charitable contributions