A cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to S status on February 14.By the end of the year,$60,000 of these receivables are collected.Calculate any built-in gains tax,assuming that there is sufficient taxable income.

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Quizplus · Accepted Answer

The built-in gain tax is calculated as the difference between the fair market value of the accounts receivable and their adjusted basis. The adjusted basis of the accounts receivable is $0 because they were acquired before the S corporation election. The fair market value of the accounts receivable is $60,000, which is the amount that was collected during the year. Therefore, the built-in gain is $60,000, and the built-in gain tax is $21,000 (35% of $60,000).

A Cash Basis Calendar Year C Corporation Reports $100,000 of Accounts