ExpertHard1 markMultiple Choice
CPA · Question 52 · Area III: Entity Tax Planning
An S Corporation has substantial AAA and AEP. The shareholders have high basis. They want to distribute AEP to avoid the passive investment income tax but want to minimize total distributions. What planning tool should they use?
An S Corporation has substantial AAA and AEP. The shareholders have high basis. They want to distribute AEP to avoid the passive investment income tax but want to minimize total distributions. What planning tool should they use?
Answer options:
A.
Make a regular distribution.
B.
Make an election to bypass AAA.
C.
Liquidate the corporation.
D.
Contribute more capital.
How to approach this question
Identify the 'AAA Bypass Election' (IRC §1368(e)(3)). This reverses the ordering rule, allowing AEP to be drained without exhausting AAA first.
Full Answer
B.Make an election to bypass AAA.✓ Correct
B
IRC §1368(e)(3). An S Corp can elect to treat distributions as coming from AEP first. This is useful to purge AEP to avoid the 'sting tax' on passive income.
Common mistakes
Assuming distributions always come from AAA first.
Practice the full CPA TCP Practice Exam 3
68 questions · hints · full answers · grading
More questions from this exam
Q01In Year 1, an executive is granted 1,000 Incentive Stock Options (ISOs) with an exercise price of...MediumQ02On January 1, Year 1, a corporation lends $500,000 to a shareholder interest-free. The loan is a ...MediumQ03A taxpayer has regular taxable income of $200,000 in Year 1. They claimed a standard deduction of...MediumQ04A U.S. citizen accepts a permanent assignment in France on January 1, Year 1. They are present in...MediumQ05A 12-year-old child has $5,000 of interest income and no earned income in Year 1. Assume the stan...Hard