Sample Questions
Question 1
Easy
Which of the following entities is required to file Form 1120-S?
Solution
D is correct.
Form 1120-S (U.S. Income Tax Return for an S Corporation) is filed by domestic corporations that have made a valid S election by filing Form 2553 under IRC Section 1362. The election must be in effect for the tax year.
Form 1120-S (U.S. Income Tax Return for an S Corporation) is filed by domestic corporations that have made a valid S election by filing Form 2553 under IRC Section 1362. The election must be in effect for the tax year.
Question 2
Medium
Apex Corp. owns 100% of four subsidiaries and is considering filing a consolidated federal income tax return. Which subsidiary must be EXCLUDED from the consolidated group?
Solution
Under IRC §1504(b), certain corporations are excluded from the definition of 'includible corporation' and cannot participate in a consolidated return. S corporations are specifically excluded under §1504(b)(8) because they are pass-through entities with their own special tax regime. The consolidated return rules apply only to C corporations. The LLC taxed as a C corporation, the manufacturing corporation, and the real estate corporation are all includible corporations eligible for consolidation.
Question 3
Hard
An S corporation has passive investment income of 150,000 and gross receipts of 400,000. The corporation has accumulated E&P from its C corporation years. Under Section 1375, what tax applies, and is the S election at risk?
Solution
C is correct.
Under IRC Section 1375, an S corporation with accumulated E&P from C corporation years that has passive investment income exceeding 25% of gross receipts is subject to a tax on its excess net passive income at the highest corporate rate (21%). Here, passive investment income of 150,000 is 37.5% of gross receipts (400,000), exceeding the 25% threshold (100,000). The excess passive income is the amount by which passive investment income exceeds 25% of gross receipts. Under Section 1362(d)(3), if the corporation has accumulated E&P and passive investment income exceeding 25% of gross receipts for three consecutive tax years, the S election is automatically terminated on the first day of the fourth year.
Under IRC Section 1375, an S corporation with accumulated E&P from C corporation years that has passive investment income exceeding 25% of gross receipts is subject to a tax on its excess net passive income at the highest corporate rate (21%). Here, passive investment income of 150,000 is 37.5% of gross receipts (400,000), exceeding the 25% threshold (100,000). The excess passive income is the amount by which passive investment income exceeds 25% of gross receipts. Under Section 1362(d)(3), if the corporation has accumulated E&P and passive investment income exceeding 25% of gross receipts for three consecutive tax years, the S election is automatically terminated on the first day of the fourth year.
