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Until the end of year 0, Magic Carpets (MC) was a C corporation with a calendar...

Until the end of year 0, Magic Carpets (MC) was a C corporation with a calendar year. At the beginning of year 1 it elected to be taxed as an S corporation. MC uses the LIFO method to value its inventory. At the end of year 0, under the LIFO method, its inventory of rugs was valued at $150,000. Under the FIFO method, the rugs would have been valued at $180,000. How much LIFO recapture tax must MC pay? Magic Carpets’ regular taxable income in year 0 was $1,000,000.

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Answer #1

SOLUTION:-

LIFO recapture tax will be calculated as follows:
(FIFO Inventory value - LIFO inventory value) x Mc's marginal tax rate
($180,000 - $150,000) x Mc's marginal tax rate
$30,000 x Mc's marginal tac rate
Thus, $30,000 will be taxed at 39.6% i.e., $11,880, which will be payable
in 4 equal installment of $2.970 and the date for making first installment
is 15th march, year1

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