Question

Exercise 22-15 (Algorithmic) (LO. 10) Matulis, Inc., a C corporation, owns a single asset with a basis of $446,400 and a fair market value of $1,071,360. Matulis elects S corporation status. Matulis holds a positive E & P balance. The entity elects S corporation status for 2019 and then sells the asset. Compute the corporate-level built-in gains tax that must be paid by Matulis. If required, round your answer to the nearest dollar.

Answer 1

Answer :

The corporate level built in gain tax that must be paid by Matulis is $ 131,242

Working Notes :

In normal scenarios , S Corporation's do not need to pay income taxes, but, a S Corporation that was previously a C corporation need to pay any built in gain tax.

Here, Matulis a C corporation sold the asset after transforming to a S Corporation. Therefore as per IRS, Matulis needs to make a tax payment at flat 21% (now being S Corporation- BIG tax rate changed from 35% to 21% in 2018 ) on the gain of asset acquired from C corporation.

Gain on asset = Fair value - Asset basis

= $ 1,071,360 - $ 446,400 = $ 624,960

Built in gain tax = $ 624,960 × 21 % = $ 131,242

[Also, there will be double taxation as the new Matulis with status S Corporation should recognize an income of $ 493,718 (i.e, 624,960 - 131,242)]