 Hello, and welcome to the session. This is Professor Farhad, in which we would look at sample CPA questions specifically on the regulation section. These topics could be covered in an entity or a corporate income tax course, but they deal specifically with S corporation. It's very important that you understand each topic on the CPA exam. Why? Because the exam is adaptive. If the AI CPA software that he notices or was able to know that you have a weakness in the S corporation, guess what? Most likely you will not pass. In other words, you have to know every topic and each topic in details, so you'll be able to answer the questions. How can I help you? Well, I practice those questions. I do have a full course about corporate income tax on my website, where I explain this topic in details plus practice. In addition to that, you would use your CPA review course in addition to my material, and you should be good to go. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,700 plus. Accounting, auditing, tax, finance lectures, and thousands of CPA questions. If you like my lectures, please like them, share them, subscribe to the channel, connect with me on Instagram. And I just, as I just stated on my website, you will find additional materials such as courses to supplement your CPA studies. And I have many CPA resources to help you get those 10 to 15 extra points to get you over 75 and move on with your life. This is a sample catalog of my resources. I have plenty of resources for you. Check out my website. So let's take a look at this first question. Again, they deal with S corporation. Remember, you have to focus on each topic separately. So you have to be confident, competent in all topics in order to pass. Farhat Court, a calendar year S has two equal shareholder, which is 50-50, for the year end of December 31st, year one. Farhat had income of 90,000, which included 60 from operating the business, 20 from investment interest income, and 10,000 from municipal bond interests. There are no other transaction for that year. Basis and the stock of Farhat for each, not for both, for each shareholder will increase by how much. Remember, it's 50-50 because they own the S corporation equally. Now, what you need to know, you need to know that any income, regardless of its source, increases the basis. Well, what income did we have? We have 60 from operation, 20 from investment interest income, and notice what they did to try to trick you. I said 10,000 from municipal bond interest. Yes, municipal bond interest is not taxable. Although it's not taxable, it increases your basis. So it's not taxable, but it increases your basis. Therefore, the total basis will increase in total by 90,000 for each shareholder. We have to divide this by two equal to 45,000. So be careful here. A classic mistake is a student would select 90,000, but the question is for each shareholder. So we have to be very careful. Let's take a look at this question. Adam is a shareholder of CER Inc., an escort. Adam's adjusted basis and the stock is 60,000 at the beginning of the year. During the year, the CER reports the following income items, ordinary income, tax exempt income and capital gain. In addition, the CER makes non-taxable distribution to Morgan of 20,000. What is the Morgan adjusted basis at year end? So this is a very classic or typical questions that you will see on the CPA exam. What is your ending basis for that S corporation? Well, what's your beginning basis plus all the changes equal to your ending basis? Your beginning basis is 60, and I just told you all income will increase your basis. This means the 30,000 will increase your basis. The 5,000 will increase your basis. The 10,000 will increase your basis, but you also have to remember that if you have a cash distribution, that's gonna reduce your basis. You had a cash distribution of 20,000. Now we know our basis. We took everything into account. As a result, your basis will be 85,000. The letter, the answer is the 85,000. Let's take a look at this question. Carmen is considering forming an S corporation. Which of the following will prevent a corporation from qualifying as an S corporation? What does that mean? It means, do you know the rules for an S corporation? Do you know what are the eligibility to have an S corporation? The corporation has one class of stock with different voting rights. Yes, you can only have one class of stocks, but it could have some voting and some non-voting. So the voting right does not matter, but one class. One class, so you could have common stock, some of it voting, some of it non-voting. That's okay. So this doesn't prevent us. The corporation has 75 shareholders. That's okay. That's okay. The limit is 100, so that's okay too. It doesn't prevent us. The corporation was formed before 1981. That's okay too. The corporation has both common and preferred. Hold on a second. No, you could only have one class of stocks, which is common, you cannot have preferred. So they will prevent you from having an S corporation. Has been an S corporation since inception. In each year one, year two, and year three, Tony Spitzer made a distribution in excess of the shareholder basis. Which of the following statement is true concerning the three years? What does it mean? They have distribution in excess of the basis. Well, think about the basis. What is the basis? The basis is how much you paid for the stock. Let's assume you paid $100 to buy a stock. Just kind of keep it simple this way. You'll be able to follow what I'm saying. So you paid $100. That's it. That's how much you paid. That's your basis. And you got $140 for that stock. You received $140. What happened is this? The first $100 is return of basis. So the first $100 of that distribution, remember they gave you, they gave you 100. So the first 100 is basis. What about the 40 in excess of the basis? Well, that's capital gain. Well, let's look at the answers. In year one and year two only the excess distribution. Why year one and year two? Why not year three? In year one only, not at all. In year three only, no. In all three years the excess distribution are taxed as capital gain. You're getting more than your basis. Therefore, the excess is considered capital gain and taxed as capital gain. And as corporation is not permitted to take a deduction for what? Well, the best way, in my opinion, to kind of get familiar with those, there's something you have to kind of memorize basically what's there and what's not. But if you look at the form, it's gonna help you tremendously determine what's deductible and what's not. So it's very important to be familiar with the deduction on form 11-20. So basically what you need to do, look at the deduction, compensation of officers, salaries and wages, repair maintenance, bed debt, rent, taxes and licenses, interest, depreciation, depletion, advertisement, pension, profit sharing, et cetera, employee benefit program, other deductions. So you have to be familiar with what is deductible and what's not. And you have to know what's not deductible. So being familiar with the 11-20, that will help you tremendously. Let's take a look at the answers. One, charitable contribution, did you see that? And the answer is no. Charitable contribution, they flow through to the shareholders on form K-1. So that's not deductible, is not permitted to deduct. Therefore, one is a correct answer. I'll take out B, I'll take out D, because one is not there. Compensation of officers, you see compensation of officers was there. Therefore, that's deductible. So that cannot be part of my answers. So immediately I take out this one, I take out A. I'm left with by process of elimination, I'm left with C. Short-term capital losses, yes. Capital losses and capital gain, they flow through as a separately stated item on K-1 to the shareholders. Therefore, the answer is C. These topics separately stated items are very important for the partnership as well as for the corporation. And I do cover them heavily with exercises and practices and multiple choice in my entity tax course. I strongly suggest you check out my website because one subscription gives you access to everything. So it doesn't have to be, you don't only have access to one course, to everything. I have 30 module of accounting and CPA reviews. Study hard, stay safe, especially those coronavirus days and good luck.