Built-in gain tax is a tax levied on the unrealized gain inherent in assets acquired by a corporation in a tax-free transaction. This gain is the difference between the fair market value of the assets and their tax basis. The built-in gain tax is typically triggered when the corporation sells or disposes of the assets. The tax is calculated by multiplying the built-in gain by the applicable tax rate. The built-in gain tax is designed to ensure that the corporation pays taxes on the gain that it has realized from the assets.
The Structure of Built-In Gains Tax
Built-in gains tax (BIG) is a tax imposed on the unrealized gains of a corporation that has been acquired by another corporation. These gains are taxed at the corporate tax rate, which can potentially result in a significant tax liability for the acquired corporation.
The structure of BIG is designed to prevent corporations from avoiding taxes by acquiring other corporations with built-in gains. These gains are often the result of depreciation deductions that have been taken over many years. If the acquired corporation were to sell its assets, it would be subject to tax on the gain. However, if the corporation is acquired by another corporation, the gain is not taxed.
BIG is designed to tax these gains at the corporate tax rate, which can be as high as 35%. This can result in a significant tax liability for the acquired corporation. In order to minimize this liability, corporations often negotiate with the acquiring corporation to have the purchase price reduced by the amount of BIG that would be owed.
The following table provides a summary of the key provisions of BIG:
| Provision | Description |
|---|---|
| Tax Rate | Corporate tax rate (as high as 35%) |
| Gains Subject to Tax | Unrealized gains on assets that have been depreciated |
| Exemptions | None |
| Payment Deadline | Due when the acquisition is complete |
BIG can be a complex tax issue. Corporations that are considering an acquisition should consult with a tax advisor to discuss the potential tax implications.
Here are some additional points to keep in mind:
- BIG can be a significant tax liability for the acquired corporation.
- Corporations often negotiate with the acquiring corporation to have the purchase price reduced by the amount of BIG that would be owed.
- BIG is a complex tax issue. Corporations that are considering an acquisition should consult with a tax advisor to discuss the potential tax implications.
Question 1:
What is built-in gain tax?
Answer:
Built-in gain tax is a type of tax that is levied on the difference between the cost basis of an asset and its fair market value when the asset is sold. This tax is only applicable to assets that were acquired before a certain date, typically the date that a corporation became an S corporation.
Question 2:
How is built-in gain tax calculated?
Answer:
Built-in gain tax is calculated by multiplying the difference between the cost basis of an asset and its fair market value by the corporation’s highest marginal tax rate. The resulting amount is the amount of tax that is owed on the built-in gain.
Question 3:
What are the consequences of not paying built-in gain tax?
Answer:
If a corporation does not pay built-in gain tax, it may be subject to penalties and interest charges. Additionally, the corporation may lose its S corporation status.
Thanks for taking the time to learn about built-in gain tax. I know it can be a bit of a head-scratcher, but understanding it can save you some serious dough down the road. If you have any other tax-related questions, be sure to check out my other articles. I’m always happy to help. And don’t forget to stop by again soon for more money-saving tips!