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 the corporate tax rate is 35%.Clampett,Inc.'s taxable income in 2018 would have been $1,000,000 if it had been a C corporation.How much built-in gains tax does Clampett,Inc.pay in 2018?

Question

Quizplus · Accepted Answer

As Clampett Inc. converted to an S corporation on January 1, 2017, it became subject to the built-in gains tax rules for a period of five years. In 2018, Clampett Inc. sells its entire inventory for $60,000, which results in a built-in gain of $30,000 ($60,000 - $30,000). The built-in gains tax rate for S corporations is the highest corporate tax rate applicable in the year the gain is recognized, which is 35% for 2018. Therefore, Clampett Inc. would have to pay a built-in gains tax of $10,500 ($30,000 x 35%) in 2018. Thus, the correct answer is option C.