CPA Regulation (REG) : Taxation of Flow-Through Entities
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Example Questions
Example Question #1 : Eligibility Requirements For S Corps
Assuming all other requirements are met, a corporation may elect to be treated as an S corporation under the Internal Revenue Code if it has:
Both common and preferred stockholders.
One hundred or fewer stockholders.
A partnership as a stockholder.
The consent of a majority of the stockholders.
One hundred or fewer stockholders.
Election for S corporation status requires the agreement of all voting and nonvoting shareholders. Additionally, eligibility for election to S status is the same as eligibility for S corporations themselves: only certain persons may be a shareholder (such as individuals, estates, trusts, and charitable organizations – corporations and partnerships are not allowed); there may no more than 100 shareholders; and there may be only one class of common stock (preferred stock is not permitted).
Example Question #22 : Taxation Of Flow Through Entities
The tax on built-in gains is a corporate level tax on S corps that dispose of assets that:
Appreciated while the company was a C corp
Appreciated during a 10 year period from when an S election is effective
Appreciated within 12 months of electing S corporation status
Appreciated while the company was an S corp
Appreciated while the company was a C corp
An S corp may have to pay a corporate level built in gains tax when it disposes of assets that were appreciated in value at the time the company converted from a C corp to an S corp.
Example Question #23 : Taxation Of Flow Through Entities
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder:
Decreases the shareholder’s basis for the stock
Must be returned to the S corporation
Increases the shareholder’s basis for the stock
Has no effect on the shareholder’s basis for the stock
Decreases the shareholder’s basis for the stock
If an S corporation has no accumulated earnings and profits, the amount distributed to a stockholder decreases the basis for the stock. The distribution is nontaxable to the extent of the shareholder’s basis.
Example Question #2 : Eligibility Requirements For S Corps
A corporation may elect to be treated as an S corporation under the IRC if:
It has both common and preferred shareholders
It has 100 or fewer shareholders
It is an LLC
A partnership is listed as a shareholder
It has 100 or fewer shareholders
Of the following, only having 100 or fewer shareholders would allow the corporation to elect an S corp election. The other criteria negate this.
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