ExpertMedium1 markMultiple Choice
CPA · Question 48 · Area 3: Entity Tax Compliance
An S Corporation was formerly a C Corporation. It has Net Unrealized Built-in Gains (NUBIG) of $100,000 at conversion. In Year 3 (within recognition period), it sells an asset with a built-in gain of $20,000. The corporation's taxable income for Year 3 is $15,000. What is the recognized built-in gain subject to tax?
An S Corporation was formerly a C Corporation. It has Net Unrealized Built-in Gains (NUBIG) of $100,000 at conversion. In Year 3 (within recognition period), it sells an asset with a built-in gain of $20,000. The corporation's taxable income for Year 3 is $15,000. What is the recognized built-in gain subject to tax?
Answer options:
A.
$20,000
B.
$15,000
C.
$0
D.
$5,000
How to approach this question
1. Identify Potential BIG: $20,000.<br/>2. Identify Taxable Income Limitation: $15,000.<br/>3. Rule: Recognized BIG is limited to taxable income.<br/>4. Result: $15,000 subject to tax. (Remaining $5,000 carried forward if applicable).
Full Answer
B.$15,000✓ Correct
B
The tax is imposed on the lesser of the recognized built-in gain ($20,000) or the taxable income ($15,000). Thus, $15,000 is subject to tax.
Common mistakes
Ignoring the taxable income limitation.
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