Chapter 22 S Corporations

Question

Chapter 22 S Corporations

Question # 00045608 Posted By: paul911 Updated on: 01/31/2015 04:00 PM Due on: 02/02/2015

Subject Business Topic General Business Tutorials:

Question

83. {Planning} Knowshon, sole owner of Moreno Inc., is contemplating electing S status for the corporation. Provide recommendations related to Knowshon’s election under the following alternative scenarios:

a. At the end of the current year, Moreno Inc. has a net operating loss of $800,000 carryover. Beginning next year, the company expects to return to profitability. Knowshon projects that Moreno will report profits of $400,000, $500,000, and $600,000 over the next three years. What suggestions do you have regarding the timing of the S election? Explain.

b. How would you answer (a) if Moreno Inc. had been operating profitably for several years, and thus had no net operating loss?

c. While several of Moreno Inc.’s assets have appreciated in value (to the tune of $2,000,000), the corporation has one property--some land in a newly identified flood zone—that has depreciated by $1,500,000. Knowshon plans on selling the loss property in the next year or two. Assume that Moreno does not have a net operating loss. What suggestions do you have for timing the sale of the flood zone property and why?

84. {Planning} Barry Potter and Winnie Weasley are considering making an S election on March 1, 2014, for their C corporation, Omniocular. However, first they want to consider the implications of the following information:

· Winnie is a U.S. citizen and resident.

· Barry is a citizen of the United Kingdom, but a resident of the United States.

· Barry and Winnie each own 50 percent of the voting power in Omniocular. However, Barry’s stock provides him with a claim on 60 percent of the Omniocular assets in liquidation.

· Omniocular was formed under Arizona state law, but it plans on eventually conducting some business in Mexico.

a) Is Omniocular eligible to elect S corporation status? If so, when is the election effective?

For the remainder of the problem, assume Omniocular made a valid S election effective January 1, 2014. Barry and Winnie each own 50 percent of the voting power and have equal claim on Omniocular’s assets in liquidation. In addition, consider the following information:

· Omniocular reports on a calendar tax year.

· Omniocular’s earnings and profits as of December 31, 2013 were $55,000.

· Omniocular’s 2013 taxable income was $15,000.

· Omniocular’s assets at the end of 2013 are as follows:

*$110,000 under FIFO accounting.

On March 31, 2014, Omniocular sold the land for $42,000.
In 2014, Omniocular sold all the inventory it had on hand at the beginning of the year. This was the only inventory it sold during the year.

Other Income/Expense Items for 2014
Sales Revenue	$155,000
Salary to owners	(50,000)
Employee wages	(10,000)
Depreciation expense	(5,000)
Miscellaneous expenses	(1,000)
Gain on sale of machinery	12,000
Interest income	40,000
Dividend income	65,000

Assume that if Omniocular were a C corporation for 2014, its taxable income would have been $88,500.

b. How much LIFO recapture tax is Omniocular required to pay and when is it due?

c. How much built-in gains tax, if any, is Omniocular required to pay?

d. How much excess net passive income tax, if any, is Omniocular required to pay?

e. Assume Barry’s basis in his Omniocular stock was $40,000 on January 1, 2014. What is his stock basis on December 31, 2014?

For the following questions, assume that after electing S corporation status Barry and Winnie had a change of heart and filed an election to terminate Omniocular’s S election effective August 1, 2015.

In 2015, Omniocular reported the following income/expense items:

	January 1 – July 31, 2015 (212 days)	August 1 – December 31, 2015 (153 days)	January 1 – December 31, 2015
Sales revenue	$80,000	$185,000	$265,000
Cost of goods sold	(40,000)	(20,000)	(60,000)
Salaries to Barry and Winnie	(60,000)	(40,000)	(100,000)
Depreciation expense	(7,000)	(2,000)	(9,000)
Miscellaneous expenses	(4,000)	(3,000)	(7,000)
Interest income	6,000	5,250	11,250
Overall net income (loss)	($25,000)	$125,250	$100,250

f. For tax purposes, how would you recommend Barry and Winnie allocate income between the short S corporation year and the short C corporation year if they would like to minimize double taxation of Omniocular’s income?

g. Assume in part (f) that Omniocular allocates income between the short S and C corporation years in a way that minimizes the double taxation of its income. If Barry’s stock basis in his Omniocular stock on January 1, 2015, is $50,000, what is his stock basis on December 31, 2015?

h. When is the earliest tax year in which Omniocular can be taxed as an S corporation again?

85. Abigail, Bobby, and Claudia are equal owners in Lafter, an S corporation that was a C corporation several years ago. While Abigail and Bobby actively participate in running the company, Claudia has a separate day job and is a passive owner. Consider the following information for 2014:

As of January 1, 2014, Abigail, Bobby, and Claudia each have a basis in Lafter stock of $15,000 and a debt basis of $0. On January 1, the stock basis is also the at-risk amount for each shareholder.
Bobby and Claudia also are passive owners in Aggressive LLC, which allocated business income of $14,000 to each of them in 2014. Neither has any other source of passive income (besides Lafter, for Claudia).
On March 31, 2014, Abigail lends $5,000 of her own money to Lafter.
Anticipating the need for basis to deduct a loss, on April 4, 2014, Bobby takes out a $10,000 loan to make a $10,000 contribution to Lafter. Bobby uses his automobile ($12,000 fair market value) as collateral.
Lafter has an accumulated adjustments account balance of $45,000 as of January 1, 2014.
Lafter has C corporation earnings and profits of $15,000 as of January 1, 2014.
During 2014, Lafter reports a business loss of $75,000 computed as follows:

Sales revenue $90,000

Cost of goods sold (85,000)

Salary to Abigail (40,000)

Salary to Bobby (40,000)

Business (loss)Lafter also reported $12,000 of tax-exempt interest income.

What amount of Lafter’s 2014 business loss of $75,000 are Abigail, Bobby, and Claudia allowed to deduct on their individual tax returns? What are each owner’s stock basis and debt basis (if applicable) and each owner’s at-risk amount with respect to the investment in Lafter at the end of 2014?

Abigail:

During 2015, Lafter made several changes to its business approach and reported $18,000 of business income, computed as follows:

Sales Revenue $208,000

Cost of goods sold (90,000)

Salary to Abigail (45,000)

Salary to Bobby (45,000)

Marketing expense (10,000)

Business income $18,000

Lafter also reported a long-term capital gain of $24,000 in 2015.

Lafter made a cash distribution on July 1, 2015, of $20,000 to each shareholder.

What amount of gain/income does each shareholder recognize from the cash distribution on July 1, 2015?

86. While James Craig and his former classmate Paul Dolittle both studied accounting at school, they ended up pursuing careers in professional cake decorating. Their company, Good to Eat (GTE), specializes in custom sculpted cakes for weddings, birthdays, and other celebrations. James and Paul formed the business at the beginning of 2014 and each contributed $50,000 in exchange for a 50 percent ownership interest. GTE also borrowed $200,000 from a local bank. Both James and Paul had to personally guarantee the loan. Both owners provide significant services for the business. The following information pertains to GTE’s 2014 activities.

GTE uses the cash method of accounting (for both book and tax purposes) and reports income on a calendar-year basis.
GTE received $450,000 of sales revenue and reported $210,000 of cost of goods sold (it did not have any ending inventory).
GTE paid $30,000 compensation to James, $30,000 compensation to Paul, and $40,000 of compensation to other employees (assume these amounts include applicable payroll taxes if any).
GTE paid $15,000 of rent for a building and equipment, $20,000 for advertising, $14,000 in interest expense, $4,000 for utilities, and $2,000 for supplies.
GTE contributed $5,000 to charity.
GTE received a $1,000 qualified dividend from a great stock investment (it owned 2 percent of the corporation distributing the dividend) and it recognized $1,500 in short-term capital gain when it sold some of the stock.
On December 1, 2014, GTE distributed $20,000 to James and $20,000 to Paul.

Required:

a. Assume James and Paul formed GTE as an S corporation.

· Complete GTE’s Form 1120S page 1, Form 1120 S, Schedule K, and Paul’s Form 1120S Schedule K-1 (note that you should use 2013 tax forms).

· Compute the tax basis of Paul’s stock in GTE at the end of 2014.

· What amount of Paul’s income from GTE is subject to FICA or self-employment taxes?