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Generating Built-in Gains Tax in an S-Corporation Return in ProConnect Tax

by Intuit Updated 8 months ago

A C Corporation electing S Corporation status after 1986 can incur a Built In Gains Tax on any taxable gains from the disposition of an asset during its corporation period, if disposed of within 5 years of the effective date of the S Corporation election. The tax is the difference between the fair market value (FMV) and the adjusted basis at the time of change from C to S status. It can't exceed the total gain on the asset. It also is limited to the taxable income calculated as if it were a C corporation and can't exceed the Net Unrealized Built In Gain at the beginning of the tax year. (This amount is shown on line 8 of Schedule B, 1120S, page 2.)

Scenario 1 - Net unrealized built in gain

The Net Unrealized Built In Gain at the beginning of the tax year is the NUBI Gain at the time of conversion from a C Corporation to a S Corporation reduced by prior years' recognized Built In Gains down to zero or 5 years from the S Corporation election, whichever comes first.

To enter a Net Unrealized Built-in Gain:

  1. Go to Input Return General Miscellaneous Information. 
  2. Select the Miscellaneous tab.
  3. Scroll down to the subsection labeled Net Unrealized Built in Gain.
  4. Enter the following items as applicable:
    • Federal
    • State, if different (-1=none)
    • Pool of assets 

The amount of Built-in Gain is limited to the Schedule B, line 8 amount.

However, if no entry is made, the software assumes the current Built-in Gain is all unrecognized. The smaller of the current-year Built-in Gain, the net unrealized gain at the beginning of the tax year, or the taxable income (computed as if filing as a C Corporation) becomes the Net Recognized Built In Gain. It is then reduced by any NOL carry forward from when the S Corporation was a C Corporation.

Enter a NOL Carry Forward:

  1. Go to Input Return Other Federal Taxes. 
  2. Select the Built-In-Gains tab.
  3. Scroll to the section labeled Built-in-Gains Tax (Schedule D, Part III)
  4. Enter the amount in the field labeled Section 1374(b)(2) deduction (line 19)

Scenario 2 - Built-in Gain on Dispositions:

To Enter Built-in Gain on Dispositions:  The steps below are in addition to the normal entries for a disposition. The Sales Price must be greater than the Cost or Basis

  1. Go to Input Return Schedule K Dispositions. 
  2. Select Details for the asset. 
  3. Select the Schedule D tab. 
  4. Scroll down to the Built-In Gains Tax (Schedule D) section
  5. Enter the FMV at conversion
  6. Enter the *Adjusted basis at conversion.

To Enter Built-in Gain on Depreciable Assets:  The steps below are in addition to the normal entries for the disposition of a depreciable asset. The Sales Price must be greater than the Cost or Basis

  1. Go to Input Return Ordinary Income Depreciation
  2. Select Details for the asset. 
  3. Select the Disposition tab. 
  4. Scroll down to the Built-In Gains Tax (Schedule D) section
  5. Enter the FMV at conversion
  6. Enter the Adjusted basis at conversion.

The Built In Gains Tax is reduced by any Business Credit that was carried forward when the Corporation operated as a C Corporation.

To Enter Business Credit Carryovers:

  1. Go to Input Return Other Federal Taxes. 
  2. Select the Built-In-Gains tab.
  3. Scroll to the section labeled Built-in-Gains Tax (Schedule D, Part III)
  4. Enter in the amount of Business credit carry forwards from C years (line 22)

Note: The amount of the Capital Gain or Section 1231 gain reported on Form 1120S should be reduced by the amount of the Built In Gain Tax.

Scenario 3 - Other Built In Gains: 

It is also possible to have a Built In Gain on ordinary income. (The most common example of this scenario regards inventory (because inventory sales are included in Cost of Goods Sold as ordinary income.) If inventory was carried over from the C Corporation to the S Corporation, and is sold at a gain, it is also subject to Built In Gains Tax.

To Enter a Built-in-Gain as Ordinary Income

  1. Go to Input Return Other Federal Taxes. 
  2. Select the Built-In-Gains tab.
  3. Scroll to the section labeled Built-in-Gains Tax (Schedule D, Part III)
  4. Under the Ordinary Income [Page 1, line 12] subsection
  5. Enter the amount of Other recognized built-in gains/losses

This is treated the same was as Built-in Capital Gain, except the software reduces the amount of Ordinary Income on line 1 of Schedule K by this portion of the Built-in Gains Tax. This type of tax is a deduction on page 1, line 12, of the 1120S. If the Optional Taxes Statement is triggered, a line item will appear.

Note: This process does not trigger a Schedule D.  The amount(s) will appear on the General Information form, as a carryover to the following year.

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