Question & Answer

Dejan owns stock in two S corporations, Blue and Green. He actively participates in the management of Blue but maintains ownership in Green only as a passive investor.  Dejan has no other business investments.  Both Blue and Green anticipate a loss this year, and Dejan’s basis in his stock of both corporations is $0. All else equal, if Dejan plans on making a capital contribution to at least one of the corporations this year, to which firm should he contribute in order to increase his chances of deducting the loss allocated to him from the entity?  Why?

Chandra was the sole shareholder of Pet Emporium, which was originally formed as an S corporation.  When Pet Emporium terminated its S election on August 31, 2023, Chandra had a stock basis and an at-risk amount of $0.  Chandra also had a suspended loss from Pet Emporium of $9,000. What amount of the suspended loss is Chandra allowed to deduct, and what is her basis in her Pet Emporium stock at the end of the post-termination transition period under the following alternative scenarios (assume Pet Emporium files for an extension to file its tax returns)?  

a. Chandra makes capital contributions of $7,000 on August 30, 2024, and $4,000 on September 14, 2024.

Timo is the sole owner of Jazz Inc., an S corporation.  On October 31, 2024, Timo executed an unsecured demand promissory note of $15,000 and transferred the note to Jazz (Jazz could require Timo to pay it $15,000 on demand).  When Timo transferred the note to Jazz, his tax basis in his Jazz stock was zero. On January 31, 2025, Timo paid the $15,000 to Jazz as required by the promissory note.  For the taxable year ending December 31, 2024, Jazz incurred a business loss of $12,000.  How much of the loss clears the stock and debt basis hurdles for deductibility?

Birch Corp., a calendar-year corporation, was formed three years ago by its sole shareholder, James, who has operated it as an S corporation since its inception.  Last year, James made a direct loan to Birch Corp. in the amount of $5,000.  Birch Corp. has paid the interest on the loan but has not yet paid any principal.  (Assume the loan qualifies as debt for tax purposes.)  For the year, Birch experienced a $25,000 business loss.  What amount of the loss clears the tax-basis limitation, and what is James’s basis in his Birch Corp. stock and Birch Corp. debt in each of the following alternative scenarios?

Assume the same facts as in the previous problem, except that at the beginning of year 1 Sunita loaned Bikes-R-Us $3,000.  In year 2, Bikes-R-Us reported ordinary income of $12,000. What amount is Sunita allowed to deduct in year 1?  What are her stock and debt bases in the corporation at the end of year 1?  What are her stock and debt bases in the corporation at the end of year 2?

Sunita is a one-third owner in Bikes-R-Us, an S corporation that experienced a $45,000 loss this year (year 1). If her stock basis is $10,000 at the beginning of the year, how much of this loss clears the hurdle for deductibility (assume at-risk limitation equals the tax-basis limitation)? If she cannot deduct the whole loss, what happens to the remainder?  Is she able to deduct the entire loss if she sells her stock at year-end?

Harriet, Herm, and Ronde formed an S corporation called Innovet. Harriet and Herm both contributed cash of $25,000 to get things started. Ronde was a bit short on cash but had a parcel of land valued at $60,000 (basis of $50,000) that he decided to contribute.  The land was encumbered by a $35,000 mortgage. What tax bases will each of the three have in their stock of Innovet?

In year 2, Julio and Milania each received distributions of $25,000 from Falcons Corporation.

a.  What amount of ordinary income and separately stated items are allocated to them for year 2 based on the information above? Assume that Falcons Corporation has $200,000 of qualified property (unadjusted basis).

Assume Jack and Jill, 25 and 75 percent shareholders, respectively, in UpAHill Corporation, have tax bases in their shares at the beginning of year 1 of $24,000 and $56,000, respectively. Also assume no distributions were made. Given the income statement above, what are their tax bases in their shares at the end of year 1?

Jack and Jill are owners of UpAHill, an S corporation. They own 25 and 75 percent, respectively. 

a. What amount of ordinary income and separately stated items are allocated to them for years 1 and 2 based on the information above?  Assume that UpAHill Corporation has $100,000 of qualified property (unadjusted basis) in both years.

Winkin, Blinkin, and Nod are equal shareholders in SleepEZ, an S corporation. In the conditions listed below, how much income should each report from SleepEZ for 2025 under both the daily allocation and the specific identification allocation methods?  Refer to the following table for the timing of SleepEZ’s income.

Hughie, Dewey, and Louie are equal shareholders in HDL, an S corporation. HDL’s S election terminates under each of the following alternative scenarios. When is the earliest it can again operate as an S corporation?

Assume the following S corporations, gross receipts, passive investment income, and corporate E&P. Will any of these corporations have its S election terminated due to excessive passive income? If so, in what year?  All became S corporations at the beginning of year 1.

Cathy, Heathcliff, and Isabelle are equal shareholders in Wuthering Heights (WH), an S corporation. Heathcliff has decided he would like to terminate the S election. In the following alternative scenarios, indicate whether the termination will occur and indicate the date if applicable (assume no alternative termination dates are selected).

Missy is one of 100 unrelated shareholders of Dalmatian, an S corporation. She is considering selling her shares. Under the following alternative scenarios, would the S election be terminated? Why or why not?

Maria has been operating Mansfield Park as a C corporation and decides she would like to make an S election. What is the earliest the election will become effective under each of these alternative scenarios?

a. Maria is on top of things and makes the election on January 1, 2024.

Effective Jan. 1, 2024

b. Maria is mostly on top of things and makes the election on January 15, 2024.

Effective Jan. 1, 2024

c. Maria makes the election on February 10, 2024. She needed a little time to convince a C corporate shareholder to sell its stock to a qualifying shareholder. That process took all 

Lucy and Ricky Ricardo live in Los Angeles, California.  After they were married, they started a business named ILL Corporation (a C corporation).  For state law purposes, the shares of stock in ILL Corp. are listed under Ricky’s name only.  Ricky signed the Form 2553 electing to have ILL taxed as an S corporation for federal income tax purposes, but Lucy did not sign.  Given that California is a community property state, is the S election for ILL Corp. valid?

Janelle wants to create an S corporation called J’s Dance Shoes (JDS). Describe how the items below affect her eligibility for an S election.

a. Because Janelle wants all her shareholders to have an equal say in the future of JDS, she gives them equal voting rights and decides shareholders who take a more active role in the firm will have priority in terms of distribution and liquidation rights. 

Compare and contrast S corporations, C corporations, and partnerships in terms of tax consequences at formation, shareholder restrictions, income allocation, basis calculations, compensation to owners, taxation of distributions, and accounting periods. 

On what form does an S corporation report its income to the IRS?  When is the tax return due?  What information does the S corporation provide to shareholders to allow them to complete their tax returns?

When must an S corporation make estimated tax payments?

Is the LIFO recapture tax a C corporation tax or an S corporation tax?  Explain.

When is an S corporation required to pay the excess net passive income tax?

When is an S corporation required to pay a built-in gains tax?

How do the tax consequences of S corporation liquidating distributions differ from the tax consequences of S corporation operating distributions at both the corporate and shareholder levels?