Clampett, Inc. converted to an S corporation on January 1, 2014. 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 2015, 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 2015?

Question

Quizplus · Accepted Answer

The built-in gains tax is calculated as the difference between the fair market value of the assets and their adjusted basis at the time of conversion to an S corporation. In this case, the built-in gain is $20,000 ($60,000 - $40,000). However, the built-in gains tax is only payable if the S corporation has net income in excess of its net operating loss carryover. In this case, Clampett, Inc. has a net operating loss carryover of $20,000, which is equal to its net income in 2015. Therefore, Clampett, Inc. does not pay any built-in gains tax in 2015.