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Complete all necessary pages of Form 8949 before you complete line 1, 2, 3, 8, 9, or 10 of Schedule D.
Figure gain or loss on each line. First, subtract cost or other basis in column (e) from proceeds (sales price) in column (d). Then combine the results with any adjustments in column (g). Enter the results in column (h). Enter negative amounts in parentheses.
Example 3—adjustment.
Column (d) is $6,000, column (e) is $2,000, and column (g) is ($1,000). Enter $3,000 in column (h).
Section 1374 provides for a tax on built-in gains. The built-in gains tax may apply to the following S corporations.
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An S corporation that was a C corporation before it elected to be an S corporation.
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An S corporation that acquired an asset with a basis determined (in whole or in part) by reference to its basis (or the basis of any other property) in the hands of a C corporation (a transferred-basis acquisition). See section 1374(d)(8).
An S corporation may owe the tax if it has net recognized built-in gain during the applicable recognition period. For tax years beginning in 2012 or 2013, the applicable recognition period is the 5-year period beginning:
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For an asset held when the S corporation was a C corporation, on the first day of the first tax year for which the corporation is an S corporation; or
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For an asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation, on the date the asset was acquired by the S corporation.
A corporation described in both (1) and (2), above, must figure the built-in gains tax separately for the group of assets it held at the time its S election became effective and for each group of assets it acquired from a C corporation with basis determined (in whole or in part) by reference to the basis of the asset (or any other property) in the hands of the C corporation. For details, see Regulations section 1.1374-8.
Certain transactions involving the disposal of timber, coal, or domestic iron ore under section 631 are not subject to the
built-in gains tax. See Rev. Rul. 2001-50, which is on page 343 of Internal Revenue Bulletin 2001-43 at
www.irs.gov/pub/irs-irbs/irb01-43.pdf.
Generally, enter the amount that would be the taxable income of the corporation for the tax year if only recognized built-in gains (including any carryover of gain under section 1374(d)(2)(B)) and recognized built-in losses were taken into account.
Generally, recognized built-in gain includes the following items.
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Any gain recognized during the applicable recognition period on the sale or distribution (disposition) of any asset, except to the extent the corporation establishes that:
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The asset was not held by the corporation as of the beginning of the applicable recognition period, or
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The gain exceeds the excess of the fair market value of the asset as of the beginning of the applicable recognition period over the adjusted basis of the asset at that time; and
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Any item of income that is properly taken into account during the applicable recognition period but is attributable to periods before the applicable recognition period.
Generally, recognized built-in loss includes the following items.
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Any loss recognized during the applicable recognition period on the disposition of any asset to the extent the corporation establishes that:
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The asset was held by the corporation as of the beginning of the applicable recognition period, and
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The loss does not exceed the excess of the adjusted basis of the asset as of the beginning of the applicable recognition period, over the fair market value of the asset as of that time; and
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Any amount that is allowed as a deduction during the applicable recognition period (determined without regard to any carryover) but is attributable to periods before the applicable recognition period.
For details, see section 1374(d) and Regulations section 1.1374-4.
The corporation must show on an attachment its total net recognized built-in gain and list separately any capital gain or loss and ordinary gain or loss.
Figure taxable income by completing lines 1 through 28 of Form 1120. Follow the instructions for Form 1120. Enter the amount from line 28 of Form 1120 on line 17 of Schedule D. Attach to Schedule D the Form 1120 computation or other worksheet used to figure taxable income.
For corporations figuring the built-in gains tax for separate groups of assets, taxable income must be apportioned to each group of assets in proportion to the net recognized built-in gain for each group of assets. For details, see Regulations section 1.1374-8.
Note.
Taxable income is figured as provided in section 1375(b)(1)(B) and is generally figured in the same manner as taxable income for line 9 of the Excess Net Passive Income Tax Worksheet for Line 22a in the Instructions for Form 1120S.
If, for any tax year in the recognition period, the amount on line 16 exceeds the taxable income on line 17, the excess is treated as a recognized built-in gain in the succeeding tax year. This carryover provision applies only in the case of an S corporation that made its election to be an S corporation after March 30, 1988. See section 1374(d)(2)(B).
For corporations figuring the built-in gains tax for separate groups of assets, do not use the amount from Schedule B, line 8. Instead, figure the amount of net unrealized built-in gain separately for each group of assets.
Enter the section 1374(b)(2) deduction. Generally, this is any net operating loss carryforward or capital loss carryforward (to the extent of net capital gain included in recognized built-in gain for the tax year) either arising in tax years for which the corporation was a C corporation or acquired in a transferred-basis acquisition (defined earlier). The section 1374(b)(2) deduction must be figured and applied separately for each separate group of assets. See section 1374(b)(2) and Regulations section 1.1374-5.
Enter the section 1374(b)(3) credit. Generally, this is any general business credit arising in tax years for which the corporation was a C corporation or acquired in a transferred-basis acquisition (defined earlier). The section 1374(b)(3) credit must be figured and applied separately for each separate group of assets. Section 1374(b)(3) business credit and minimum tax credit carryforwards from C corporation years are subject to the business credit limitation in section 38(c) and the AMT credit limitation in section 53(c), as modified by Regulations section 1.1374-6(b).
If corporations made the section 168(k)(4) election in prior years, they can elect to increase these limitations for pre-2006
unused minimum tax credits in lieu of claiming the special depreciation allowance for certain property acquired after March
31, 2008, and placed in service before January 1, 2013. (For corporations with tax years ending after December 31, 2012, this
election is available for certain property placed in service before January 1, 2014.) For details, see Form 4562, Depreciation
and Amortization; Form 8827, Credit for Prior Year Minimum Tax—Corporations; and related instructions. Also, see Rev. Proc.
2009-33, 2009-29 I.R.B. 150, available at
www.irs.gov/irb/2009-29_IRB/ar09.html; Rev. Proc. 2009-16, 2009-6 I.R.B. 449, available at
www.irs.gov/irb/2009-06_IRB/ar10.html; and Rev. Proc. 2008-65, 2008-44 I.R.B. 1082, available at
www.irs.gov/irb/2008-44_IRB/ar15.html.
The built-in gains tax is treated as a loss sustained by the corporation during the same tax year. The character of the deemed loss is determined by allocating the loss proportionately among the net recognized built-in gains giving rise to the tax and attributing the character of each net recognized built-in gain to the allocable portion of the loss. Deduct the tax attributable to:
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Short-term capital gain as short-term capital loss on Schedule D, line 6.
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Long-term capital gain as long-term capital loss on Schedule D, line 14.
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Ordinary income as a deduction for taxes on Form 1120S, line 12.
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