Question

Matulis, Inc., a calendar year C corporation, owns a single asset with a basis of $325,000 and a fair market value of $800,000. Matulis holds a positive E & P balance. The entity elects S corporation status for 2020 and then sells the asset. Compute the corporate-level built-in gains tax that must be paid by Matulis.

Answer 1

Section 1374 imposes a corporate-level tax that must be paid by Matulis if it sells the asset after electing S status based on the built in gain of

$475,000 ($800,000−$325,000).

 

Upon sale of the asset, the corporation owes a tax of

$166,250 [($800,000−$325,000) * 35%]

 

The shareholders have a $308,750 taxable gain ($475,000−$166,250).

 

Hence, the built-in gains tax effectively imposes a double tax on Matulis and its shareholders.

Hence, the built-in gains tax effectively imposes a double tax on Matulis and its shareholders.