ExpertHard1 markMultiple Choice
CPA · Question 29 · Area III: Entity Tax Planning
An S Corporation (formerly a C Corp) sells an asset in Year 1 for a gain of $100,000. The asset was held when the S election was made 3 years ago. At the time of election, the asset had a built-in gain of $80,000. The S Corp's taxable income for Year 1 (calculated as if it were a C Corp) is $60,000. What is the amount of Built-in Gains (BIG) tax liability (assume 21% rate)?
An S Corporation (formerly a C Corp) sells an asset in Year 1 for a gain of $100,000. The asset was held when the S election was made 3 years ago. At the time of election, the asset had a built-in gain of $80,000. The S Corp's taxable income for Year 1 (calculated as if it were a C Corp) is $60,000. What is the amount of Built-in Gains (BIG) tax liability (assume 21% rate)?
Answer options:
A.
$21,000
B.
$16,800
C.
$12,600
D.
$0
How to approach this question
BIG Tax Base is the LEAST of: 1. Recognized Gain ($100k), 2. Original Built-in Gain ($80k), 3. Current Year Taxable Income ($60k). Apply tax rate to the lowest number.
Full Answer
C.$12,600✓ Correct
$12,600
IRC §1374. The tax is imposed on the lesser of the recognized built-in gain ($80,000) or the taxable income of the corporation if it were a C corporation ($60,000). $60,000 * 21% = $12,600.
Common mistakes
Taxing the full gain or the full BIG without checking the taxable income limitation.
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