Apple,Inc. ,a cash basis S corporation in Orange,Texas,formerly was a C corporation.Apple has the following assets and liabilities on January 1,2010,the date the S election is made. During 2010,Apple collects the accounts receivable and pays the accounts payable.The land is sold for $3 million,and taxable income for the year is $590,000.What is Apple's built-in gains tax?

Question

Apple,Inc. ,a cash basis S corporation in Orange,Texas,formerly was a C corporation.Apple has the following assets and liabilities on January 1,2010,the date the S election is made.  During 2010,Apple collects the accounts receivable and pays the accounts payable.The land is sold for $3 million,and taxable income for the year is $590,000.What is Apple's built-in gains tax?

Quizplus · Accepted Answer

As Apple was a C corporation before electing as an S corporation, it is subject to the built-in gains tax for the first 5 years of the election. The built-in gains tax applies to the net recognized built-in gain during this period.

To calculate the net recognized built-in gain, we need to compare the fair market value (FMV) of the assets on the date of the S corporation election with their adjusted basis. From the given information, we can calculate the following:

FMV of land = $3 million (given in the question)
Adjusted basis of land = $1 million (not given, assumed)
Net built-in gain on land = FMV - Adjusted basis = $3 million - $1 million = $2 million

There is no net built-in gain on accounts receivable and accounts payable, as they are collected and paid during the year.

Therefore, the net recognized built-in gain for the year is $2 million, which is less than the taxable income of $590,000. The built-in gains tax rate is 35%, so the tax liability would be:

$2 million x 35% = $700,000

However, the tax liability is limited to the taxable income for the year, so the built-in gains tax for Apple is the lesser of:

- $700,000 (net recognized built-in gain)
- $590,000 (taxable income)

Therefore, Apple's built-in gains tax is $206,500 (choice B).

Apple,Inc ,A Cash Basis S Corporation in Orange,Texas,formerly Was a C