S Corporations: Built-in Gains Tax
1.Riverside Corporation was organized on January 1, 2012. On February 15, 2014, it elected S status effective for calendar year 2014. On January 1, 2014 Riverside Corporation only had one asset: land worth $1,000,000 and a basis of $500,000.The land was sold in November 2014 for $1,200,000. Riverside's 2014 taxable income was $300,000, not including the gain on sale of land.
a. How much is Riverside's built-in gains tax?
b. How much income is subject to tax on the shareholders' returns?
2. Corporation X makes an S election. In its first year as an S corporation, it recognizes $500,000 of built-in gains, but overall has a $200,000 taxable loss. In the second year, X has taxable income of $200,000.
Corporation Y recognizes $500,000 of built-in gain, but breaks even from operations in each of the first two years (X and Y are economically in the same position at the end of the two- year period).
a. How much built-in gains tax is paid in the first year by X? Second year?
b. How much built-in gains tax does Y pay in the first year? Second year? What planning point do you see?
This question was asked on Jul 19, 2016 and answered on Jul 19, 2016 for the course BUSINESS 53:010:584 at Rutgers - Camden.
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