Mock Corporation converts to S corporation status in 2015.Mock used the LIFO inventory method in 2014 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 2014 corporate tax liability,assuming that Mock is subject to a 35% tax rate.

Question

Quizplus · Accepted Answer

When an S corporation converts from the LIFO method to another inventory method, it must include in income the difference between the LIFO reserve and the reserve that would have existed had the corporation used the new inventory method for tax purposes. In this case, since Mock had $435,000 in LIFO inventory and converted to a FIFO method, its LIFO reserve would have been $115,000 ($550,000 - $435,000). Therefore, Mock would need to include $40,250 ($115,000 x 35%) in income for 2014.

Mock Corporation Converts to S Corporation Status in 2015