Tax Exam 2

QC:3-1 High Corporation Incorporates on May 1st and begins business on May 10th of the current year. What alternative tax years can High elect to report its initial year’s income?

Unless High Corp is an S corp or a personal service corp, High can select a tax year ending on the last day of any month

QC:3-3 Stan and Susan, two individuals, are starting a new business to manufacture and sell digital circuits. They intend to incorporate the business with $600000 of their own capital and $2 Million of equity capital obtained from other investors…Incur 40000 organization exps and 100000 of start up expenses. Also incurs losses of 500000 in 1st two years but be profitable in the 4th year.

For each method of election, explain the possible alternatives and the adv + disadv of each alternative

The corp needs to choose and accounting period. It generally can select either a Calendar year or a fiscal year, a Fiscal year can permit an income deferral. if it elects S-corp status the corp generally is required to use the calendar year.

The corp needs to select an accounting method. it is required to use the arrual method of accounting for sales-related items bc inventories are a material income-producing factor abut may want to use cash method for other items as long as its eligible

The corp needs to select an acc method that would be best for its inventory because the price of digital circuits is expected to decline int he coming years, the LIFO, method may not be a good choice.

The corp needs to determine whether it will deduct up to 5000 and amortize the balance of org exps. An election is advisable bc the election cannot be made retroactively, if upon audit, the IRS reclassifies deducted exps as org expenditures. A similar election cannot be made for the start-up expenditures because they exceed 50000 by more than 5000.

Stan and Susan need to determine whether they want to have the corp make an S election to pass through start-up losses, and how much debt and equity they would like to use to capitalize the corporation.

QC:3-2 Port Corp wants to change its tax year from a calendar year to a fiscal year ending June 30th. Port is a C corp owned by 100 shareholders, none of whom own more than 5% of the stock. Can Port change its tax year? If so, how can it accomplish the change?

Yes, Port may change its annual accounting period. It may do so without prior approval if it meets certain conditions, including, but not limited to, the following: it may not have changed its accounting period w/in the previous 48 months, it must close its books on the last day of the short-period and subsequently compute its income and keep its book using the new tax year, and it must file full 12-month returns for subsequent years ending on the new yr-end. If Port does not meet these requirements, it can request approval for a change in accounting period by filing Form 1128

QC:3-4 Compare the tax treatment of capital gains and losses by a corporation and by an individual

Corporations and Individuals compute capital gains and losses the same way. However, corps cannot deduct capital losses from ordinary income, and instead carry a capital loss back three years and over 5 years to to offset gains. Individuals can carry losses over for an indefinite period.

QC:3-5 What are organizational expenditures? How are they treated for tax purposes?

Include outlays incident to the creation of the corp, chargeable tot eh corp’s capital accounting, and of a character that would be amortizable if the corp had a limited life. The corp can elect under Sec 248 to deduct the 1st 5000 of expenditures incurred in the corp’s first tax year and to amortize the remainder over a period of 180 months starting w/ the month in which the corp begins business operations.

QC:3-6 What are Start-up expenditures? How are they treated for tax purposes?

Are ordinary and necessary business expenses paid or incurred to investigate the creation or acquisition of an active trade or business, to create an active trade or business, or to conduct an activity engaged in for profit or the production of income before the time the activity becomes an active trade or business. A corporation can elect to deduct the first 5000 of the expenditures and amortize the remainder over a period of 180 months starting with the month in which an active trade or business begins.

QC:3-7 What limitations apply to a corporation’s deduction for business interest?

For tax years beginning after Dec 31st, 2017, the deductibility of business int in a given year is limited to the sum of the following amounts: business int inc, 30% of adjusted TI, and floor plan financing interest for motor vehicles.

QC:3-8 Describe three ways in which the treatment of charitable contributions by individual and corporate taxpayers differ.

They differ three ways, (1) the timing of the deduction, (2) the amount of the deduction permitted for the contribution of certain nonmonetary property, and (3) the maximum deduction permitted in any given year.

QC:3-9 Carver Corporation uses the accrual method of accounting and the calendar year as its tax year. Its board of directors authorizes a cash contribution on Nov 3 of Yr 1, that the corp pays on March 9 of Yr 2. In what year(s) is it deductible? What happens if the corporation does not pay the contribution until April 20 of Yr 2?

If Carver Corporation pays the contribution on March 9 of Yr 2, Carver may elect to deduct it in Yr 1. However, if Carver pays it on April 20 of Yr 2 (after the 15th days of the 4th month following the end of Yr1), Carver cannot deduct the contribution in Yr 1 but must deduct it in Yr 2. If Carver pays the contribution on March 9 of Yr2, but does not elect to deduct in Yr 1, Carver deducts it in Yr 2.

QC:3-10 In the current year, Zero Corp contributes inventory (computers) to State University in its mathematics program. The computers have a $1,225 cost basis and a $2800 FMV. How much is Zero’s charitable contribution deduction for the computers? (Ignore 10% limit)

Deduction if property qualifies as scientific research property under Sec. 170e4= Cost basis+ ½ (FMV- Cost basis) (1225 + 1/2(2800-1225) = $2012.50

Deduction if property does not qualify as scientific research property= 1225 (lesser of FMV or cost basis)

QC:3-11 Why are corporations allowed a dividends-receivable deduction? What dividends qualify for this special deduction?

Corps are allowed a DRD to partially or fully mitigate the effects of multiple corporate taxation earnings. Dividends received by a domestic corp from another domestic corp (other than S corp) qualify for a 50%,65% , or 100% deduction. Dividends from a greater than 10%- owned foreign subsidiary are eligible for a 100% Sec. 245a DRD. Distributions that receive capital gain treatment, dividends on stock held 45 days or less, and dividends on debt- financed stock are not eligble.

QC:3-12 Why is a dividends-received deduction disallowed if the stock on which the corporation pays the dividend is debt-financed?

It is disallowed to prevent a corporation from deducting interest paid on money borrowed to purchase the stock, while paying little or no tax on the dividends received on the stock. Otherwise, the corporation could gain an arbitrage advantage by acquiring debt-financed stock.

QC:3-13 Crane Corp incurs a $75000 NOL in the current year. In which years can Crane use this NOL? What limitations might apply?

Crane Corp may carry its NOL over to future years indefinitely. In carryover years, the NOL deduction is limited to 80% of taxable income before the NOL deduction.

QC:3-14 What special restrictions apply to the deduction of a loss realized on the sale of property between a corporation and a shareholder who owns 60% of the corporation’s stock? What restrictions apply to the deduction of expenses accrued by a corporation at year-end and owed to a cash method share-holder who owns 60% of the corporation’s stock?

pt 1: The deduction of the loss is denied for losses realized on the sale or exchange of property b/t a corp and a shareholder who owns more than 50% of the corps stock. The purchasing party can use the loss at a later date to reduce their recognized gain on a subsequent sale or exchange of the property.

pt 2: The deduction is denied for accrued expenses involving a corporation and a controlling shareholder that use different accounting methods when the payee will include the item in gross income at a date that is later than when it is accrued by the payor. The payor deducts the expense at the time the payee includes it in gross income.

QC:3-15 Describe the three types of controlled groups.

1. Parent-Subsidiary

2. Brother-Sister

3. Combined Controlled

QC:3-16 List three restrictions on claiming multiple tax benefits that apply to controlled groups of corps. Why do such restrictions exist?

1. Minimum accumulated earnings tax credit

2. Sec. 179 Exp limitation

3. General Business tax credit limitation

Special restrictions apply bc controlled groups must apportion tax benefits among its members to prevent them from avoiding limitations through the use of multiple related corps

QC:3-17 What are the major advantages and disadvantages of filing a consolidated tax return?

An advantages includes income of a profitable member can be offset by losses of another member. However, a disadvantage includes losses of an unprofitable member may limit deductions or credits of a profitable member.

QC:3-18 What are the tax advantages of substituting nontaxable fringe benefits for salary paid to a shareholder-employee?

This permits the shareholder-employee to exclude these amounts from personal taxation while the corp obtains a deduction for the expenditure.

QC:3-19 Explain the tax consequences to both the corporate and a shareholder-employee if an IRS agent determines that a portion of the compensation paid in a prior tax year exceeds a reasonable compensation level.

If the IRS determines a portion of the compensation paid is unreasonable, then the corporation loses its tax deduction for that portion of the payment. The shareholder-employee will still be liable for this amount on their personal return as compensation for the year.

QC:3-20 What corporations must pay estimated taxes? When are the estimated tax payments due?

A corp must pay estimated taxes if its tax liability exceeds 500. The pmts are due April 15, June 15, Sept 15, and Dec 15 for a calendar year corporation unless the 15th falls on a weekend or holiday, in which case amts paid on the next business day are considered as paid on the due date. For a fiscal yr corp, the dude dates are the 15ths day of the 4th, 6th, 9th, and 12ths months of the tax year.

QC:3-21 What is a “large” corporation for purposes of the estimated tax rules? What special rules apply to such large corporations?

A large corp is one whose taxable income was $1 million or more in any of its three immediately preceding tax years. If this applies, estimated taxes must be based on the current year’s liability.

QC:3-22 What penalties apply to the underpayment of estimated taxes? The late payment of the remaining tax liability?

A nondeductible penalty applies if a corporation does not deposit its required estimated tax installment on or before the due date of that installment. The IRS assesses interest if any remaining tax due is not paid by the ORIGINAL due date for the corporate tax return.

QC:3-23 Describe the situations in which a corporation must file a tax return.

A tax return must be filed each year whether it has taxable income or not, until the corp is dissolved. If the corp was incorporated during the year, a short-period return must be filed for the portion of the year it was in existence.

QC:3-24 When is a corporate tax return due for a calendar year taxpayer? What extensions of time in which to file the return are available?

A corporate tax return is due by April 15th. An automatic 6- month extension is available if Form 7004 is filed.

QC:3-25 List four types of differences that can cause a corporation’s book income to differ from its taxable income.

(1) Some book income is not taxable, (2) some gross income is not included in book income for the current period (3) some financial accounting expenses are not deductible for tax purposes, (4) some deductions allowed for tax purposes are not expenses in determining book income for the current period.

QC:9-1 Yvonne and Larry plan to begin a business that will grow plants for sale to retail nurseries. They expect to have substantial losses for the first three years of operations while they develop their plants and their sales operations. Both Yvonne and Larry have substantial interest income, and both expect to work full-time in this new business. List three advantages for operating this business as a partnership instead of a C Corp.

Advantages include (1) partnerships are not subject to tax, thereby eliminating the problem of double taxation that exists for C Corps, (2) partners may divide the partnership’s profit or loss among themselves without regard for their proportionate capital interests, (3) under the conduit principle of taxation, partnership losses and other items receiving special tax treatment flow through to the partners.

QC:9-2 Bob and Carol want to open a bed and breakfast inn as soon as they buy and renovate a turn-of-the-century home. What would be the major disadvantage of using a general partnership rather than a corporation for this business? Should they consider any other form for structuring their business?

Disadvantage: Lack of limited liability

Both A and B

Yes, they may want to consider a LLC or a limited liability limited partnership LLLP

QC:9-3 Sam wants to help his brother, Lou, start a new business. Lous is a capable auto mechanic but has little business sense, so he needs Sam to help him make business decisions. Should this partnership be arranged as a general partnership or as a limited partnership. Why? Should they consider any other form for structuring their business?

General Partnership because Sam will be providing business advice. The brothers may want to consider an LLC to provide limited liability.

QC:9-4 Doug contributes services but no property to the CD Partnership upon its formation. What are the tax implications of his receiving only a profits interest versus his receiving a capital and profits interest?

Whether Doug receives a profit interest or a capital and profits interest, he theoretically should report the value of the property he receives for services as ordinary income.

QC:9-5 An existing partner wants to contribute property having a basis less than its FMV for an additional interest in the partnership.

1. Should he contribute the property to the partnership?

2. What are his other options?

3. Explain the tax implications for the partners of these other options.

1. No bc an existing partner can contribute the property tax free but Sec. 704c requires that the tax attributes from contributed property be allocated to the partner that contributes the property, meaning the difference b/t the property’s FMV and its tax basis is allocated to the existing partner who contributed the property only.

2. An existing partner could sell or lease the property to the partnership or sell the property to a third party who then contributes the property to the partnership

3. the most probably likelihood is that ordinary income would be recognized.

QC:9-6 Jane contributes valuable property to a partnership in exchange for a general partnership interest. The partnership also assumes the recourse mortgage Jane incurred when she purchased the property two years ago.

1. How will the liability affect the amount of gain that Jane must recognize

2. How will it affect her basis in the partnership interest?

1. Jane recognizes gain on the contribution of property and assumption of a liability if the amount of the liability assumed by the other partners exceed Jane’s basis in the contributed property plus her share of existing partnership liabilities

2. Her basis in the partnership interest will be DECREASED by the amount of the liability assumed by the other partners.

QC:9-7 Which of the following items can be deducted (up to 5000) and amortized as part of a partnership’s organizational expenditures?

Only A, b, and D

Legal fees for drawing up partnership agreement, accounting fees for establishing an accounting system, and D filing fees required under state law in initial year to conduct business in the state.

QC:9-8 The BW Partnership reported the following current year earnings: 30,000 interest from tax-exempt bonds, $50,000 LTCG, and $100,000 net income from operations. Bob saw these numbers and told his partner, Wendy, that the partnership had $100,000 taxable income. Is he correct? Explain your answer.

Partnership taxable income is: 150000 (100,000+50,000) Bob is incorrect. The 100000 is ordinary income, while the 150000 is taxable income.

QC:9-9 Why are partnerships required to report certain items as separately stated, whereas other items may be combined into a total called partnership ordinary income (or loss)? List three examples of separately stated items.

E. Certain items are separately stated at the partnership level so their character can remain intact at the partner reporting level

G. All taxable items of income, gain, loss, or deduction that do not have to be separately stated are combined into a total called partnership ordinary income or loss.

H. As a general rule, an item must be separately stated if the income tax liability of any partner that would result from treating the item separately is different from the liability that would result if that item were included in the partnership ordinary income.

QC:9-10 Why did congress enact the 20% qualified business income deduction? Congress enacted the qualified business income deduction to give pass-through entity owners:

A tax rate somewhat comparable to the 21% corporate tax rate. Thus, congress did not want to give a tax break to C Corps while not giving a tax break to businesses operating in a pass-through form.

QC:9-11 How will a partner’s distributive share be determined if the partner sells one-half of their beginning-of-the-year partnership interest at the beginning of the tenth month of the partnership’s tax year?

The partner’s distributive share will EQUAL the sum of the partner’s earnings for one half of their beginning-of-the-year interest for the entire year and the partner’s earnings for the other one-half of their beginning-of-the-year interest for nine months.

QC:9-12 Can a recourse debt of a partnership increase the basis of a limited partner’s partnership interest? Explain.

No, because a limited partner normally has no economic risk or recourse debt

QC:9-13 The ABC Partnership has a nonrecourse liability that is incurred by borrowing from an unrelated bank. It is secured by an apartment building owned and managed by the partnership. The liability is not convertible into an equity interest. How does this liability affect the at-risk basis of general partner Anna and limited partner Bob?

The financing meets the requirements for qualified nonrecourse real estate financing so is therefore included in the at-risk basis of both general and limited partners.

QC:9-14 Is the Sec. 704(d) loss limitation rule more or less restrictive than the at-risk rules? Explain.

It is less restrictive. Sec.704d limits the loss to the adjusted basis of a partner’s interest in the partnership at the end of the partnership tax year in which the loss occurs. The basis includes recourse debt and nonrecourse debt. The at-risk basis does not include nonrecourse debt.

QC:9-15 Jeff, a 10% limited partner in the recently formed JRS Partnership, expects to have losses from the partnership for several more years. He is considering purchasing an interest in a profitable general partnership in which he will materially participate. Will the purchase allow him to use losses from the JRS Partnership?

No. As a limited partner in the JRS Partnership, Jeff is almost certainly subject to the passive loss limitation rules on losses from this partnership. Accordingly, income from a general partnership in which Jeff materially participates cannot be used to offset the passive losses. Jeff can use losses from the JRS Partnership only to offset passive income, or he can claim the losses when he sells his entire interest in the JRS Partnership or when the partnership terminates.

QC:9-16 Helen, a 55% partner in ABC Partnership, owns land ( a capital asset) having a $200,000 basis and a $250,000 FMV. She plans to transfer the land to the ABC Partnership, which will be subdivide the land and sell the lots. Discuss whether Helen should sell or contribute the land to the partnership.

Helen should contribute the property. ABC Partnership will hold the land as inventory for resale to customers and not as a capital asset. Because Helen owns more than a 50% int in the ABC Partnership, the sale of the land to the partnership will generate ordinary income instead of capital gain for Helen. If Helen instead contributes the land to the partnership, it will recognize no gain until it sells the lots.

QC:9-17 The TUV Partnership is considering two compensation schemes for Tracy, the partner who runs the business on a daily basis. Tracy can be given a $10,000 guaranteed payment, or she can be given a comparably larger distributive share (and distribution) so that she receives about $10,000 more each year. From the standpoint of when the income must be reported in Tracy’s tax return, are these two compensation alternatives the same? Are there any other points of comparison that may be relevant?

Yes. Regulation Sec. 1.707-1c provides that a partner reports guaranteed pmts as ordinary income in the partner’s tax year that includes the last day of the partnership’s tax year in which the partnership deducted the pmts under its method of accounting. A partner reports their distributive share of partnership items in the tax year that includes the last day of the partnership’s tax year. Thus, from a timing perspective, the two pmt schemes are the same to Tracy.

QC:9-18 Roy’s father gives him a capital interest in the Family Partnership. Discuss whether the Sec.704e family partnership rules apply to this interest.

The Sec. 704e rules apply only to a capital interest in a partnership, where capital is a material income-producing factor and where the family member is the true owner of the interest. If capital is a material income-producing factor for the partnership, the family partnership rules apply.

QC:11-1 List five advantages and five disadvantages of making an S election. Briefly explain each item.

1. Corp inc exempt from corp inc tax. An S corp’s income is taxed only to its shareholders whose tax bracket may be lower than Corps.

2. Splitting the S corps income among family members is possible. However, inc splitting is restricted by the requirement that reasonable compensation be provided to family members who provide capital services

3. Deductions, losses, and tax credits are separately stated and retain their character when passed through to S/Hs.

4. Undistributed inc taxed to s/h is not taxed again when subsequently distributed

5. Corp’s losses pass through to its S/H and can be used to reduce the taxes owed on other types of inc.

Dis:

1. S corps are subject to an excess net passive income tax and built-in gains tax

2. dividends received by the s corp are not eligible for the DRD

3. The S corps earnings are taxed to the shareholders even though they are not distributed

4. S corp shareholders marginal tax rate on pass-through inc may be higher than 21%

5. allocation of ordinary inc or loss and the separately stated items is based on the stock owned each day of the tax year.

QC:11-2 Julio, age 50, is a U.S. citizen who has a 22% marginal tax rate. He has operated the A&B Automotive Parts Company for a number of yrs as a C Corp. Last year, A&B reported $200,000 of pre-tax profits, from which it paid $50,000 salary and $25,000 in dividends to Julio. The corp expects this yr’s pre-tax profits to be $300,000. To daye, the corp has created no fringe benefits or pension plans for Julio. Julio asks you to explain whether an S corp election would reduce his taxes. How do you respond to Julio’s inquiry?

Only slightly higher, applicable capital gains rate

the entire amount, regardless of whether the corporation distributes it, individual marginal rate of 22% or higher, would not be

step-up the basis of Julio’s S corporation stock, built-in gains tax that could arise during the first five years

QC:11-3 Celia, age 30, is leaving a major systems development firm to establish her own firm. She will design computer-based systems for small- and medium-sized businesses. Celia will invest $100,000 in the business. She hopes to operate near her breakeven point during her first year, although a small loss is possible. Profits will build up slowly over the next four years until she is earning $150,000 a year in her 5th year. Celia has heard about S corps and asks you whether the S corp form would be advisable for her new business. How do you respond to Celia’s inquiry?

Limited Liability, an attractive form, pass through to shareholder, offset any income that Celia would earn from other sources

Qualified business income deduction, can be terminated fairly easily,

Limited Liability benefits, tax benefits, check-the-box regulations, would not, treated as partnershipp

QC:11-4 Lance and Rodney are contemplating starting a new business to manufacture computer software games. They expect to encounter losses in the initial years. Lance’s CPA has talked to them about using an S Corp. Rodney, while reading a business publication, encounters a discussion on LLCs. The article talks about the advantages of using an LLC instead of an S corp. How would you respond to their inquiry?

An LLC has no restrictions on the type of number of owners. An S corp is limited to 100 shareholders, none of which may be a corporation or a partnership.

QC:11-5 Which of the following classifications make a shareholder ineligible to own stock in an S corporation?

Items b, c, and f would be ineligible s/hs

• domestic corp

• partnership where all partners are US citizens

• nonresident alien individual

QC:11-6 Will the following events cause an S election to terminate?

B. the S corp issuing nonvoting stock that has a dividend preference.

QC:11-7 What is an inadvertent termination? What actions must the S corp and its shareholders take to correct an inadvertent termination?

Inadvertent termination is when the IRS, corp, and s/h all agree that something caused termination that was unintentional.

Once determination is made, the S corp or its s/hs must take the necessary steps, within a reasonable time period after discovering the event

QC:11-8 After an S corp revokes or terminates its S election, how long must the corporation wait to make a new election? What circumstances permit an early reelection?

The corporation must wait 5 years before making a new election. An early reelection can occur when 1. more than 50% of the corp’s stock is owned by persons who did not own stock on the date of the terminations or 2. the termination was caused by events not reasonably within the control of the corp or shareholders owning a substantial interest in the corp and was not part of a plan to terminate the election involving the corp or its s/hs.

QC:11-9 What tax years can a newly created corporation that makes an S election adopt for its first tax year? If a fiscal year is permitted, does it require IRS approval?

A newly created corp that makes an S class election can adopt a calendar year w/out IRS approval. if it wishes to adopt fiscal year, it requires IRS approval.

QC:11-10 At the time Cable Corp makes its S election, it elects to use a fiscal year based on Sec.444 election. What other requirements must Cable satisfy to continue to use its fiscal year election for future tax years?

1. They must make required tax deposits

2. file form 8752 annually by may 15th

3. maintain its S corp status

QC:11-11 What are Subchapter C earnings and profits (E&P)? How does the existence of such E&P affect the S corp’s ability to earn passive income?

Are profits of the S corporation that accumulate over the years.

QC:11-12 Explain the procedures for allocating an S corporation’s ordinary income or loss to each of the shareholders. What special allocation elections are available?

Separately stated items are allocated an equal portion of 1. the item to each day of the tax year, 2. the daily amt for the item to each share of stock outstanding on each day, 3. the total daily allocations for each outstanding share of stock, 4. the total amts allocated to each share of stock held by the shareholder.

Special allocation elections are available only if the S election terminates in the tax year or if a s/h no longer holds their entire S corp stock interest.

QC:11-13 What limitations apply to the amount of loss pass-through an S corp shareholder can deduct? What happens to any losses exceeding this limitation? What happens to losses if the shareholder transfers their stock?

• each s/h’s deduction for their share of ord losses and separately stated losses is limited to the basis of their S corp stock + the bases of any debt owed by the S corp to the s/hs

• excess loss and deduction items carry over to subsequent years

• unused losses lapse if the s/h transfer their stock to anyone other than a spouse (or divorce)

QC:11-14 What action can an S corp shareholder take before yr-end to increase the amount of s corp’s losses they can deduct in the year they are incurred?

QC:11-15 What is a post-termination transition period? What loss carryovers can an S corp shareholder deduct during this period?

A one-year period immediately following the last day of the final S corporation tax year in which loss and deduction carryovers can be used by the S corp’s s/h even though the S election has been revoked or terminated. Loss carryovers can be deducted only up to the adjusted basis of the shareholder’s stock at the end of the post-termination transition period.

QC:11-16 Explain the positive and negative adjustments to the basis of an S corp shareholder’s stock investment and the basis of an S corp debt owed to the s/h.

Positive adjustments include additional capital contributions made during the tax year and the allocable share of ordinary income and separately stated income and gain items.

QC:11-17 Explain the differences between the tax treatment accorded non-liquidating property distributions made by S corps and partnerships.

An S corp recognized gain, but not loss, under Sec. 311b when it makes a nonliquidating property distribution.

QC:11-18 What nonliquidating distributions made by an S corp are taxable to its shareholders? Tax-free to its shareholders?

A return of the shareholder up to the amount of their stock investment, nontaxable, taxable as capital gains

nontaxable and reduce (but not below zero), taxable as dividend inc, nontaxable and reduce, taxable as capital gains.

QC:11-19 What is an accumulated adjustments account (AAA)? What income, gain, loss, and deduction items do not affect this account assuming the S corp has an accumulated E&P balance?

The AAA is the cumulative total of ordinary inc or loss and separately stated items for the S period. The AAA is required only for S corps that have an accumulated E&P balance.

QC:11-20 Explain the differences between the way the following items are reported by a C corp and an S corp:

a. Ordinary Income:

b. Dividend Inc:

c. Cap gains and losses:

d. Tax-exempt int inc

e. charitable contributions:

f. nonliquidating property distributions:

g. fringe benefits paid to shareholder:

QC:11-21 What is the S corp’s tax return due? What extensions are available for filing the return?

QC:11-22 What taxes must an S corp prepay by making quarterly estimated tax pmts? Can a s/h owning S corp stock use the corp’s estimated tax payments to reduce the amount of their individual estimated tax payments? Explain

The two taxes S corps must prepay are 1. excess net passive income tax and 2. built-in gains tax. These payments do not reduce shareholder’s individual estimated tax pmts but they do reduce ord inc and separately stated items passed through to the s/hs.

QC:11-23 List three major tax reporting similarities