Clampett, Inc. converted to an S corporation on January 1, 2016. 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). What is Clampett, Inc.'s built-in gain or loss on January 1, 2016?

Question

Quizplus · Accepted Answer

The built-in gain is calculated as the difference between the fair market value (FMV) and the basis of the assets. Inventory has a built-in gain of $30,000 (FMV $60,000 - Basis $30,000), and equipment has a built-in loss of $20,000 (FMV $60,000 - Basis $80,000). The net built-in gain is $10,000 ($30,000 gain - $20,000 loss). Cash and accounts receivable have no built-in gain or loss as their FMV equals their basis.