Clampett, Incorporated, converted to an S corporation on January 1, 2020. At that time, Clampett, Incorporated, 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). What is Clampett, Incorporated's built-in gain or loss on January 1, 2020?
A)$30,000 net built-in gain
B)$10,000 net built-in gain
C)$0 net built-in gain
D)$20,000 net built-in loss
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The built-in gain is calculated as the difference between the fair market value (FMV) and the basis of the assets. For inventory, the built-in gain is $30,000 ($60,000 FMV - $30,000 basis). For equipment, there is a built-in loss of $20,000 ($60,000 FMV - $80,000 basis). The accounts receivable and cash have no built-in gain or loss as their FMV equals their basis. Therefore, the net built-in gain is $10,000 ($30,000 gain - $20,000 loss).

Clampett, Incorporated, Converted to an S Corporation on January 1