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Critical Thinking: S-Corporation (100 Points)
Lockhart Corporation is a calendar-year corporation. At the beginning of 2013, its election to be taxed as an S corporation became effective. Lockhart Corp.’s balance sheet at the end of 2012 reflected the following assets (it did not have any earnings and profits from its prior years as a C corporation):
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Adjusted Basis |
FMV |
|
Cash |
$ 35,000 |
$ 35,000 |
|
Accounts receivable |
   25,000 |
  25,000 |
|
Inventory |
 180,000 |
  210,000 |
|
Land |
  125,000 |
  120,000 |
|
Totals |
$365,000 |
$390,000 |
Lockhart’s business income for the year was $65,000 (this would have been its taxable income if it were a C corporation).
- During 2013, Lockhart sold all of the inventory it owned at the beginning of the year for $250,000. What is its built-in gains tax in 2013? Be sure to show your work.
- Assume the same facts as in part (1), except that if Lockhart were a C corporation, its taxable income would have been $17,000. What is its built-in gains tax in 2013? Be sure to show your work.
- Assume the original facts except the land was valued at $115,000 instead of $120,000. What is Lockhart’s built-in gains tax in 2013? Be sure to show your work.
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