An S corporation is subject to the following tax(es). Question 7 options: a) Built-in gains tax. b) Corporate income tax. c) Alternative minimum tax.
The Correct Answer and Explanation is:
The correct answer is a) Built-in gains tax.
Explanation:
An S corporation is a special type of corporation that is generally taxed as a pass-through entity, meaning its income is not taxed at the corporate level. Instead, the income “passes through” to the shareholders, who report it on their personal tax returns. However, S corporations are subject to specific taxes under certain conditions, one of which is the built-in gains tax.
- Built-in Gains Tax:
If an S corporation was previously a C corporation and converted to an S corporation, it may still be subject to the built-in gains (BIG) tax. This tax applies if the corporation sells assets that had built-in gains at the time of the conversion. Built-in gains refer to the appreciation in value of the corporation’s assets that existed at the time of the conversion to an S corporation. If the S corporation sells these appreciated assets within a certain period (usually five years), it will be taxed at the corporate level on the gains that were “built-in” when it converted from a C corporation. This is to ensure that there is no avoidance of tax on gains that were accrued while the company was a C corporation. - Corporate Income Tax:
Generally, S corporations are not subject to corporate income tax. The tax is passed through to the shareholders, who pay individual income taxes on their share of the corporation’s income. - Alternative Minimum Tax (AMT):
The AMT typically applies to C corporations and individuals who have significant deductions that reduce their taxable income below a certain threshold. However, S corporations themselves are not subject to the AMT, although the shareholders might be, depending on their individual financial situation.
In summary, the built-in gains tax is the primary tax that an S corporation may be subject to, especially if it has converted from a C corporation and sells assets with built-in gains.
