Will Form 1120 C Limitations 2023-2024

In this video, we will discuss how to compute the corporation's basis in assets received in a section 351 transaction when the built-in loss limitation applies. Section 362 of the US tax code provides a built-in loss limitation, which states that in a section 351 transaction, you need to look at all the properties being transferred to the corporation. In this tax deferred transaction, you calculate the aggregate adjusted basis by adding up the adjusted basis of each property and the fair market values of each property. If the adjusted basis exceeds the fair market value, there will be a built-in loss limitation applied. For example, if the adjusted basis exceeds the fair market value by $25, there will be a built-in loss limitation of $25 that needs to be allocated to reduce the basis of the property being received by the corporation. Let me work through an example to make it easier to understand. Suppose you own three types of property: a ferris wheel, a set of go-karts, and a roller coaster. Assuming the adjusted basis and the cost are the same for each asset, the ferris wheel has an adjusted basis of $100,000 and a fair market value of $975,000, resulting in a built-in gain of $875,000. The go-karts have an adjusted basis of $700,000 and a fair market value of $200,000, resulting in a built-in loss of $500,000. The roller coaster has an adjusted basis of $900,000 and a fair market value of $400,000, resulting in a built-in loss of $500,000. Now, let's add up the built-in losses, which total $1 million, and the built-in gains, which total $875,000. The net amount is a built-in loss of $125,000. It is important to understand that the built-in gains offset the built-in losses and can be used for tax...