ExpertHard1 markMultiple Choice
CPA · Question 58 · Area III: Entity Tax Planning
An S Corporation elects to treat a distribution as coming from Accumulated E&P rather than the Accumulated Adjustments Account (AAA). Why might a shareholder want this?
An S Corporation elects to treat a distribution as coming from Accumulated E&P rather than the Accumulated Adjustments Account (AAA). Why might a shareholder want this?
Answer options:
A.
To increase stock basis.
B.
To avoid capital gains tax.
C.
To avoid the Passive Investment Income tax or termination of S status.
D.
To reduce the corporation's taxable income.
How to approach this question
Identify the 'Sting Tax' problem: S Corps with C Corp E&P + Passive Income > 25% of Gross Receipts. Solution: Distribute E&P (Election to bypass AAA).
Full Answer
C.To avoid the Passive Investment Income tax or termination of S status.✓ Correct
IRC §1368(e)(3) election. Distributing AEP eliminates the risk of the §1375 Passive Investment Income Tax and the §1362(d)(3) termination of S status.
Common mistakes
Thinking it's for basis reasons.
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