An S corporation in Lawrence, Kansas has a recognized built-in gain of $110,000 and taxable income of $98,000. The company has an $8,000 NOL carryforward from a C corporation year, and a $7,000 business credit carryforward from a C corporation year. The built-in gains tax liability is:

Question

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The built-in gains tax liability is calculated by multiplying the recognized built-in gain by the corporate tax rate of 21%. Therefore, the built-in gains tax liability is $110,000 x 21% = $23,100.

Next, we must determine if any of the losses or credits can be used to offset the built-in gains tax liability.

First, the NOL carryforward of $8,000 can be used to offset taxable income. Since taxable income is $98,000 and the NOL carryforward is $8,000, the taxable income is reduced to $90,000.

Next, the business credit carryforward of $7,000 can be used to offset the tax liability. Since the built-in gains tax liability is $23,100 and the business credit carryforward is $7,000, the remaining tax liability is $16,100.

Therefore, the total tax liability is $16,100, which is closest to choice B, $24,500. Choice B is the best choice.

An S Corporation in Lawrence, Kansas Has a Recognized Built-In