Question

Where to select on turbo tax business for s corporation returns to pay taxes on section 1231 gains to avoid tax again on 1040 through K-1 box 9?

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March 3, 2024
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where to select on turbo tax business for s corporation returns to pay taxes for section 1231 gains to avoid tax again on 1040 through K-1 box 9?

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Mike9241

an S-Corp is a flow-through entity so GENERALLY any income it realizes is passed through to the shareholders. Thus the S-corp does not pay any federal taxes except for the Built-In Gains tax. is this what you're asking about?

The built-in gains tax is a special federal tax imposed on an S corporation that was previously a C corporation. Here are the key points about this tax:

Purpose: The built-in gains tax aims to prevent an S corporation election from being used to circumvent the effects of a taxable liquidation.
Applicability: It generally applies to C corporations that make an S corporation election. The tax can be assessed during the five-year period beginning with the first day of the first tax year for which the S election is effective.
Trigger: The tax is triggered by the disposition of any asset that was on hand at the time the S election became effective. This includes routine transactions like collecting cash-method zero-basis accounts receivable.
Tax Rate: The built-in gains tax is imposed at the highest corporate rate, which is currently 21%.
Exceptions: An S corporation is not subject to the BIG tax if any of the following situations apply:
- It was never a C corporation.
- It had no net unrealized built-in gain (i.e., the aggregate basis of its assets exceeded their cumulative fair market value) on the date the S election became effective.
- It has previously recognized built-in gains equal to the net unrealized built-in gain on the date the S election became effective.
- The recognition period beginning with the date the S election was effective has expired, and there are no outstanding payments from installment sales that originated before or during the five-year period beginning with the date the S election became effective.
Transferred Basis Property: Even if an S corporation meets the exceptions, it can still be subject to the BIG tax if it received transferred basis property from a C corporation or an S corporation subject to the BIG tax rules.

In summary, the built-in gains tax ensures that S corporations do not avoid taxation on appreciated assets acquired during their C corporation history

to avoid complete double taxation

To replicate the effects of C corporation taxation, the shareholders are subject to tax on the corporate-level gain, net of the corporate-level tax. This result is achieved by permitting the shareholder to treat the corporate-level tax (the big tax) as a loss that has the same character as the gain that gives rise to the tax. Thus, for example, if an S corporation recognizes a $100 long-term capital gain, all of which is treated as BIG, the corporation generally incurs a $xx built-in gains tax. The shareholders recognize their allocable share of a net $100-xx long-term capital gain for the same tax year.