CPA Regulation (REG) : Eligibility Requirements for S Corps
Study concepts, example questions & explanations for CPA Regulation (REG)
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Example Questions
Example Question #1 : Eligibility Requirements For S Corps
Which of the following conditions will prevent a corporation from qualifying as an S corporation?
One shareholder is an estate.
One shareholder is a grantor trust.
The corporation has both common and preferred stock.
The corporation has one class of stock with different voting rights.
The corporation has both common and preferred stock.
Eligibility requirements for S corps include limitations on who may be a shareholder (such as individuals, estates, trusts, and charitable organizations); the number of shareholders (no more than 100); and only one class of common stock (preferred stock is not permitted). However, differences in common stock voting rights are allowed.
Example Question #2 : Eligibility Requirements For S Corps
A company terminated its S corporation status for the current tax year. When can the company reelect S status?
Cannot reelect in the future
Immediately
Third year from the current tax year
Fifth year from the current tax year
Fifth year from the current tax year
Once an S corporation has elected to terminate its status, the corporation must wait until the beginning of the fifth year after the year of termination before it can reelect S status.
Example Question #3 : 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:
The consent of a majority of the stockholders.
A partnership as a stockholder.
One hundred or fewer stockholders.
Both common and preferred 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 #4 : Eligibility Requirements For S Corps
The tax on built-in gains is a corporate level tax on S corps that dispose of assets that:
Appreciated during a 10 year period from when an S election is effective
Appreciated while the company was a C corp
Appreciated while the company was an S corp
Appreciated within 12 months of electing S corporation status
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 #5 : Eligibility Requirements For S Corps
If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder:
Has no effect on the shareholder’s basis for the stock
Decreases the shareholder’s basis for the stock
Must be returned to the S corporation
Increases 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 #6 : Eligibility Requirements For S Corps
A corporation may elect to be treated as an S corporation under the IRC if:
A partnership is listed as a shareholder
It has both common and preferred shareholders
It is an LLC
It has 100 or fewer shareholders
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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