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% and that Clampett,Inc.had a $20,000 net operating loss carryover from its prior C corporation years.How much built-in gains tax does Clampett,Inc.pay in 2018?

Question

Quizplus · Accepted Answer

Since Clampett,Inc. converted to an S corporation on January 1, 2017, it is subject to built-in gains tax for the first five years following its conversion. However, if the corporation has a net operating loss carryover from its prior C corporation years, it can offset the built-in gains tax liability. In this case, Clampett,Inc. had a $20,000 net operating loss carryover, which is greater than the built-in gain of $30,000 ($60,000 sales price - $30,000 basis). Therefore, Clampett,Inc. does not have to pay any built-in gains tax in 2018.