ExpertMedium1 markMultiple Choice
CPA · Question 55 · Area III: Entity Tax Planning
An S Corporation with AEP wants to distribute cash to shareholders but avoid dividend treatment. It has no AAA. What planning strategy could create AAA to allow tax-free distributions?
An S Corporation with AEP wants to distribute cash to shareholders but avoid dividend treatment. It has no AAA. What planning strategy could create AAA to allow tax-free distributions?
Answer options:
A.
Make a property distribution.
B.
Generate ordinary income or recognize built-in gains.
C.
Contribute capital to the corporation.
D.
Take out a loan.
How to approach this question
AAA is generated by S Corp Income. Capital contributions go to Basis, not AAA.
Full Answer
B.Generate ordinary income or recognize built-in gains.✓ Correct
IRC §1368. AAA is increased by separately and non-separately stated income items. Capital contributions increase shareholder basis but do not affect AAA.
Common mistakes
Thinking capital contributions increase AAA.
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