Question

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.

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

THANK TOU, if any queries please leave your valuable comment on comment box...........

If possible then rate the answer as well