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% and that Clampett, Inc. had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Inc. pay in 2018?

Question

Quizplus · Accepted Answer

The built-in gain is the difference between the FMV and the basis of the assets at the time of the S corporation election. In this case, the built-in gain is $20,000 ($60,000 - $40,000). The built-in gains tax is 35% of the built-in gain, which is $7,000 ($20,000 x 35%). However, Clampett, Inc. has a $20,000 net operating loss carryover from its prior C corporation years. This net operating loss can be used to offset the built-in gain, resulting in a built-in gains tax of $0.