[Anonymous]

Wiley Question –

Brooke, Inc., an S corporation, was organized on January 2, 2012, with two equal shareholders. Each shareholder invested $5,000 in Brooke’s capital stock, and each loaned $15,000 to the corporation. Brooke then borrowed $60,000 from a bank for working capital. Brooke sustained an operating loss of $90,000 for the year ended December 31, 2012. If each shareholder materially participates in the corporation’s business, how much loss can each shareholder claim on his 2012 income tax return

a. 5000
b.20,000
c.45,000
d,50,000

the correct answer is b, why the 60,000 Brooke borrowed would not increase shareholder’s basis? is that just applicable for partnership?

Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset was sold during the year for $95,000. Magic’s corporate tax rate was 35%. What was Magic’s tax liability as a result of the sale?

a.0
b.3500
c.15750
d.19250

the correct anwser is C, why is the 10,000 (95,000-85,000)none build-in gain not taxable ?

someone hlep, please

 

 

[Anonymous]

I have the same question about the built in gains question.. Why is the $10000 excluded?

Also to give a short answer in regards to the first question, that is a difference between pships and scorps. Scorp shH don't include scorp incurred debt as pro rata increases to shH basis, but pships do.

[Anonymous]

I have the same question about the built in gains question.. Why is the $10000 excluded?

Also to give a short answer in regards to the first question, that is a difference between pships and scorps. Scorp shH don't include scorp incurred debt as pro rata increases to shH basis, but pships do.

[MikeHoncho]

@chaomeng1988

Question #1

I agree with @Aldous.

Question #2

This one is tricky. Remember an S-corp is a flow-through entity. However, the built-in gain is subject to double taxation (the built-in gain in this example is taxed at 35% at the entity level). Whereas, the $10,000 gain flows through directly to the shareholders and they are subject to the tax.

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[MikeHoncho]

@chaomeng1988

Question #1

I agree with @Aldous.

Question #2

This one is tricky. Remember an S-corp is a flow-through entity. However, the built-in gain is subject to double taxation (the built-in gain in this example is taxed at 35% at the entity level). Whereas, the $10,000 gain flows through directly to the shareholders and they are subject to the tax.

Done: 5/22/14

"Always do sober what you said you'd do drunk. That will teach you to keep your mouth shut."
- Ernest Hemingway

[Vlakmir]

The first one is tricky. It's trying to get you to add debt to the basis.

Go back to your basics.

S-corp shareholders can only take a loss up to the amount of their capital balances, the rest are suspended.

1. distributions first, and they -cannot- reduce loan basis,

2. Losses last, and they can reduce loan basis (basis goes up back to original before anything else in following years)

So, for your S-corp, you have a 5,000 Basis and a 15,000 loan basis. With no distributions, you can deduct up to 20,000 of the loss. The rest is suspended. Hence, 20,000 deductible. Everything else is a red herring to confuse you with p-ships.

Second question,

Chaomeng, S-corporations do not recognize the subsequent 10,000 Gain. Remember, S-corps and P-ships separately state Capital gains and losses. the question is asking you how much the S-CORPORATION PAYS, not how much THE S-CORPORATION PAYS + SUBSEQUENT OWNERS PAY ON THEIR OWN K-1, right?

so the S-corporation itself pays the difference between FmV -AT THE DATE OF THE S-CORP STATUS- and the original basis.

This is because the C-corp property should be taxed at C-corp rates for the appreciation during C-corp years, and S-corp rates (individual K-1 Passthroughs!) at S-corp years.

Cheers.

REG - 92
AUD - 90
BEC - 82
FAR - 82
BISK Review Materials
DONE! /Happydance

[Vlakmir]

The first one is tricky. It's trying to get you to add debt to the basis.

Go back to your basics.

S-corp shareholders can only take a loss up to the amount of their capital balances, the rest are suspended.

1. distributions first, and they -cannot- reduce loan basis,

2. Losses last, and they can reduce loan basis (basis goes up back to original before anything else in following years)

So, for your S-corp, you have a 5,000 Basis and a 15,000 loan basis. With no distributions, you can deduct up to 20,000 of the loss. The rest is suspended. Hence, 20,000 deductible. Everything else is a red herring to confuse you with p-ships.

Second question,

Chaomeng, S-corporations do not recognize the subsequent 10,000 Gain. Remember, S-corps and P-ships separately state Capital gains and losses. the question is asking you how much the S-CORPORATION PAYS, not how much THE S-CORPORATION PAYS + SUBSEQUENT OWNERS PAY ON THEIR OWN K-1, right?

so the S-corporation itself pays the difference between FmV -AT THE DATE OF THE S-CORP STATUS- and the original basis.

This is because the C-corp property should be taxed at C-corp rates for the appreciation during C-corp years, and S-corp rates (individual K-1 Passthroughs!) at S-corp years.

Cheers.

REG - 92
AUD - 90
BEC - 82
FAR - 82
BISK Review Materials
DONE! /Happydance

[Author]

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