A cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to S status on February 14. By the end of the year, $60,000 of these receivables are collected. Calculate any built-in gains tax, assuming that there is sufficient taxable income.

Question

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Since the corporation converted to S status on February 14, it will be subject to the built-in gains tax for the first 5 years following the conversion. Built-in gains tax is applied to the amount of gain that would have been recognized if the corporation had sold all of its assets at fair market value on the conversion date. In this case, the corporation had $40,000 ($100,000 - $60,000) of accounts receivable remaining at the end of the year. If we assume that the fair market value of these receivables on the conversion date was also $100,000, then the built-in gain would be $60,000 ($100,000 - $40,000).

If the corporation has sufficient taxable income, it will be subject to a 21% built-in gains tax on the amount of the built-in gain. Therefore, the built-in gains tax would be $12,600 ($60,000 x 21%). Answer choice B is the closest option to this calculated amount.

A Cash Basis Calendar Year C Corporation Reports $100,000 of Accounts