Category: Corporations; Deductions & Credits Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com A net operating loss carryover from a C corporation year can offset the amount of built-in gain subject to the built-in gains tax. However, the carryover cannot be used to offset S corporation taxable income for purposes of determining the taxable income limitation on the built-in gains tax. Suppose for 1996 an S corporation triggers a built-in gain of $1 million. Taxable income before bonuses is expected to be $600,000, and the corporation has an NOL from C corporation tax years of $250,000. The corporation has two choices. 1. Bonus nothing and pay built-in gains tax on $600,000 ($1 million less $250,000 NOL carryover equals $750,000 net built-in gain which is then limited to $600,000 by virtue of the taxable income limitation.) The untaxed portion of $150,000 ($1 million less $250,000 NOL less the $600,000 on which built-in gains tax was actually paid) carries over into future years. In other words, there is a deemed triggering of a $150,000 built-in gain in 1997. 2. Bonus up to $600,000 and thereby limit the amount of the $750,000 net built-in gain which is taxable in 1996. Any untaxed portion becomes a carryover into 1997 and beyond. Section 1374(d)(2)(A)(ii) provides the taxable income limitation for purposes of the built-in gains tax. That section defines taxable income for this purpose by reference to Section 1375(b)(1)(B) which is taxable income without regard to a variety of things including the net operating loss deduction under Section 172. |
