ExpertHard1 markMultiple Choice
CPA · Question 47 · Area 4: Entity Taxation
A C Corp elected S status effective Jan 1, Year 1. At that time, it had an asset with FMV 0,000 and Basis ,000. In Year 3, it sold the asset for 0,000. The corporate tax rate is 21%. What is the Built-in Gains (BIG) Tax liability?
A C Corp elected S status effective Jan 1, Year 1. At that time, it had an asset with FMV 0,000 and Basis ,000. In Year 3, it sold the asset for 0,000. The corporate tax rate is 21%. What is the Built-in Gains (BIG) Tax liability?
Answer options:
A.
0
B.
,400
C.
,600
D.
,200
How to approach this question
BIG Tax Base = Lesser of: 1. Recognized Gain, or 2. Built-in Gain at time of election. Tax Rate = Highest Corp Rate (21%).
Full Answer
B.,400✓ Correct
,400
The Built-in Gain is the appreciation that existed at the date of S election (0,000 - ,000 = ,000). Even though the asset sold for more, the BIG tax applies only to that pre-existing ,000. ,000 * 21% = ,400.
Common mistakes
Applying tax to the full gain realized at sale.
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