SEC Corporation Has Been Operating as a C Corporation Since

question 51

Essay

SEC Corporation has been operating as a C corporation since 2015. It elected to become an S corporation, effective January 1, 2018. On December 31, 2017, SEC reported a net unrealized built in gain of $10,000. In addition to other transactions in 2018, SEC sold inventory it owned at the beginning of 2018 (it did not sell any other assets it owned at the beginning of 2018). At the beginning of the year, the inventory it sold had a fair market value of $40,000 and a FIFO tax basis of $15,000. SEC sold the inventory for $28,000. If SEC had been a C corporation in 2018, its taxable income would have been $40,000. How much built-in gains tax must SEC pay in 2018? Assume the corporate tax rate is 21%.

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Definitions:

Straight-Line Depreciation

A plan for breaking down the expense of a real asset across its viable life in steady annual segments.

Salvage Value

The anticipated earnings from an asset's sale following the cessation of its useful life.

Net Cash Flow

The variance between the cash entering and leaving a business over a given timeframe.

Straight-Line Depreciation

A method of allocating the cost of a tangible asset over its useful life in equal installments, simplifying accounting computations.