ExpertHard1 markMultiple Choice
CPA · Question 26 · Area III: Entity Tax Planning
An S Corporation was formerly a C Corporation. At the time of conversion, it had $100,000 of Net Unrealized Built-in Gains (NUBIG). In Year 3 (within the 5-year recognition period), the S Corp sells an asset with a basis of $20,000 and FMV of $50,000. The asset was held at conversion with a built-in gain of $25,000. The S Corp's taxable income for Year 3 (calculated as if it were a C Corp) is $15,000. What is the amount of Built-in Gains (BIG) Tax liability (assume 21% rate)?
An S Corporation was formerly a C Corporation. At the time of conversion, it had $100,000 of Net Unrealized Built-in Gains (NUBIG). In Year 3 (within the 5-year recognition period), the S Corp sells an asset with a basis of $20,000 and FMV of $50,000. The asset was held at conversion with a built-in gain of $25,000. The S Corp's taxable income for Year 3 (calculated as if it were a C Corp) is $15,000. What is the amount of Built-in Gains (BIG) Tax liability (assume 21% rate)?
Answer options:
A.
$6,300 (21% of $30,000)
B.
$5,250 (21% of $25,000)
C.
$3,150 (21% of $15,000)
D.
$0
How to approach this question
BIG Tax Base is the LEAST of: 1. Recognized Built-in Gain ($25k). 2. Taxable Income if C Corp ($15k). 3. Remaining NUBIG ($100k). Lesser is $15k. Multiply by 21%.
Full Answer
C.$3,150 (21% of $15,000)✓ Correct
C
IRC §1374. The tax is applied to the lesser of the recognized built-in gain ($25,000) or the taxable income limitation ($15,000). $15,000 * 21% = $3,150. The untaxed gain ($10,000) is carried forward to the next year.
Common mistakes
Ignoring the taxable income limitation; taxing the full gain realized ($30k) instead of the built-in portion ($25k).
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