Clampett, Inc. converted to an S corporation on January 1, 2018. 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 2019, Clampett, Inc. sells its entire inventory for $60,000 (Basis $30,000). Assume the corporate tax rate is 21% and that Clampett Inc.'s taxable income would have been a $50,000 loss in 2019 if it had been a C corporation. In 2020, Clampett, Inc.'s taxable income would have been $100,000 if it had been a C corporation. How much built-in gains tax does Clampett, Inc. pay in 2019? In 2020?

Question

Quizplus · Accepted Answer

$0 in 2019 (because the net-built in gains are limited to the corporation's taxable income using C corporation tax rules); $2,100 in 2020 (because the built-in gains limited in 2019 are treated as built-in gains in the next tax year; the net built-in gains of $10,000 × 21% corporate tax rate results in $2,100 of tax).