Clampett, Inc. converted to an S corporation on January 1, 2017. At that time, Clampett, Inc. had cash ($40,000), inventory (FMV $60,000, Basis $30,000), accounts receivable (FMV $40,000, Basis $40,000), and equipment (FMV $60,000, Basis $80,000). In 2018, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assuming thecorporate tax rate is 35%. Clampett, Inc.'s taxable income in 2018 would have been$1,000,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2018?

Question

Quizplus · Accepted Answer

As an S corporation, Clampett, Inc. is subject to built-in gains tax for the first five taxable years after conversion. Any gains on assets held at the time of the S corporation conversion (in this case, the inventory with a basis of $30,000) that are recognized within the five-year period are subject to a 35% built-in gains tax.

In 2018, Clampett, Inc. sold its inventory for $60,000, resulting in a gain of $30,000. Since this gain was recognized within the five-year period after the S corporation conversion, it is subject to the built-in gains tax. Therefore, Clampett, Inc. would owe a built-in gains tax of $10,500 (35% of $30,000).

The correct answer is C.