ExpertHard1 markMultiple Choice
CPA · Question 31 · Area V: Entity Taxation
An S Corporation distributes property with a fair market value of $50,000 and an adjusted basis of $30,000 to its sole shareholder. What is the tax consequence to the S Corporation?
An S Corporation distributes property with a fair market value of $50,000 and an adjusted basis of $30,000 to its sole shareholder. What is the tax consequence to the S Corporation?
Answer options:
A.
No gain or loss is recognized.
B.
$20,000 gain is recognized and flows through to the shareholder.
C.
$20,000 gain is recognized but taxed at the corporate level only.
D.
The shareholder takes a basis of $30,000 in the property.
How to approach this question
Treat property distribution as a SALE to the shareholder for FMV. Gain = FMV - Basis. This gain flows through to the shareholder.
Full Answer
B.$20,000 gain is recognized and flows through to the shareholder.✓ Correct
Under IRC §311(b), a corporation (C or S) recognizes gain on the distribution of appreciated property as if the property were sold to the shareholder at its FMV. For an S Corp, this gain ($20,000) flows through to the shareholder on the K-1.
Common mistakes
Thinking distributions are tax-free to the entity.
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