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 a C corporation, Apple would have built-in gains tax if it sold its appreciated assets within 5 years of its S corporation election. Upon the sale of land for $3 million, Apple realizes a gain of $2 million ($3 million selling price - $1 million basis). If this gain was recognized within 5 years of the S corporation election (i.e. in 2010), it would be subject to built-in gains tax at the highest corporate tax rate of 35%. Therefore, the amount of built-in gains tax would be $2 million x 35% = $700,000. However, Apple has an NOL carryover of $493,500, which can be applied to offset taxable income for the year. Therefore, the built-in gains tax would be reduced to $206,500 ($700,000 - $493,500).

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