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). In 2021, Clampett, Incorporated, sells its entire inventory for $60,000 (basis $30,000). Assume the corporate tax rate is 21 percent and that Clampett, Incorporated, had a $20,000 net operating loss carryover from its prior C corporation years. How much built-in gains tax does Clampett, Incorporated, pay in 2021?
A)$10,500
B)$10,000
C)$2,100
D)$0
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The built-in gains tax does not apply because the net operating loss carryover from the C corporation years offsets the built-in gain on the sale of inventory. Therefore, Clampett, Incorporated, would not pay any built-in gains tax in 2021.

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