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
USCo wholly owns ForeignSub, a CFC with $4,000,000 of tested income and QBAI of $10,000,000. What is USCo's GILTI inclusion before the Section 250 deduction?
Solution
D is correct.
GILTI (IRC §951A): net CFC tested income minus deemed tangible income return (DTIR), where DTIR equals 10% of QBAI.
| Item | Amount | Why |
|---|---|---|
| Tested income | $4,000,000 | ForeignSub CFC tested income |
| DTIR | ($1,000,000) | 10% x $10,000,000 QBAI |
| **GILTI inclusion** | **$3,000,000** | Pre-§250 deduction |
The Section 250 deduction (50%) would further reduce taxable GILTI to $1,500,000, but the question asks for the pre-deduction inclusion.
GILTI (IRC §951A): net CFC tested income minus deemed tangible income return (DTIR), where DTIR equals 10% of QBAI.
| Item | Amount | Why |
|---|---|---|
| Tested income | $4,000,000 | ForeignSub CFC tested income |
| DTIR | ($1,000,000) | 10% x $10,000,000 QBAI |
| **GILTI inclusion** | **$3,000,000** | Pre-§250 deduction |
The Section 250 deduction (50%) would further reduce taxable GILTI to $1,500,000, but the question asks for the pre-deduction inclusion.
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.
