Mock Corporation converts to S corporation status in 2013.Mock used the LIFO inventory method in 2012 and had a LIFO inventory of $435,000 (FIFO value of $550,000)on the date of the S election.How much tax must be added to Mock's 2012 corporate tax liability,assuming that Mock is subject to a 35% tax rate.

Question

Quizplus · Accepted Answer

When a corporation that has been using LIFO converts to S corporation status, there is a one-time tax on the difference between the LIFO inventory value and the inventory's value under FIFO. This is known as the LIFO recapture tax. In this case, the LIFO recapture tax would be the difference between the LIFO inventory value of $435,000 and the FIFO value of $550,000, which is $115,000.

However, only a portion of this amount is subject to tax. The amount of LIFO recapture tax that is subject to tax is equal to the lesser of the LIFO reserve or the amount of taxable income in the last year before the S election. Since we don't know Mock's taxable income for 2012, we can assume that it is at least equal to the LIFO reserve of $115,000.

Therefore, the LIFO recapture tax that is subject to tax is $115,000, and multiplying by the 35% corporate tax rate, we get a tax liability of $40,250.

Therefore, the correct answer is B) $10,062.50.

Mock Corporation Converts to S Corporation Status in 2013