ExpertHard1 markMultiple Choice
CPA · Question 53 · Area III: Entity Tax Planning
An S Corporation (former C Corp) sells an asset in Year 1 for a gain of $100,000. The asset was held when the S election was made. 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?
An S Corporation (former C Corp) sells an asset in Year 1 for a gain of $100,000. The asset was held when the S election was made. 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?
Answer options:
A.
21% of $100,000
B.
21% of $80,000
C.
21% of $60,000
D.
$0
How to approach this question
BIG Tax Base = Lesser of: 1. Recognized Built-in Gain. 2. Taxable Income (if C Corp). Apply 21% rate.
Full Answer
C.21% of $60,000✓ Correct
C
IRC §1374(d)(2). The net recognized built-in gain for the year is limited to the corporation's taxable income. <br/>Recognized BIG = $80,000. <br/>Taxable Income = $60,000. <br/>Base = $60,000. <br/>Tax = $60,000 * 21%.
Common mistakes
Applying tax to the full built-in gain without checking the taxable income limit.
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