1120-US: Deductible built-in gain tax on the S Corporation return (FAQ)

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Question

Why is the built-in gain tax deductible on the S Corporation return?

Answer

Per IRC section 1366(f)(2), the built-in gain tax is treated as a loss sustained by the S Corporation during such taxable year. The character of the loss is determined by allocating the loss proportionately among the recognized built-in gains that gave rise to the built-in gain tax.

The built-in gain tax attributable to ordinary income property is deducted on the Taxes and licenses line on Form 1120S, Page 1. The built-in gain tax attributable to short-term or long-term capital gain property is reported on Schedule D as a subtraction from the total short-term or long-term capital gain.

Related topic: 1120-US: Built-in gain tax calculation for S Corporations FAQs

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