§ 1.1374-6. Credits and credit carryforwards.

X is a C corporation that elects to become an S corporation effective January 1, 1996. On that date, X has a $500,000 business credit carryforward from a C year and Asset #1 with a fair market value of $400,000, a basis for regular tax purposes of $95,000, and a basis for alternative minimum tax purposes of $150,000. In 1996, X has net recognized built-in gain of $305,000 from selling Asset #1 for $400,000. Thus, X's tentative tax under paragraph (a)(3) of § 1.1374-1 and regular tax liability under paragraph (b) of this section is $106,750 ($400,000−$95,000 = $305,000 × .35= $106,750, assuming a 35 percent tax rate). Also, X's tentative minimum tax determined under paragraph (b) of this section is $47,000 [$400,000−$150,000 = $250,000−$15,000 ($40,000 corporate exemption amount −$25,000 phase-out = $15,000) = $235,000 × .20 = $47,000, assuming a 20 percent tax rate]. Thus, the business credit limitation under section 38(c) is $59,750 [$106,750−$47,000 (the greater of $47,000 or $20,438 (.25 × $81,750 ($106,750−$25,000 = $81,750))) = $59,750]. As a result, X's section 1374 tax is $47,000 ($106,750−$59,750= $47,000) for 1996 and X has $440,250 ($500,000−$59,750 = $440,250) of business credit carryforwards for succeeding taxable years.

Y is a C corporation that elects to become an S corporation effective January 1, 1996. On that date, Asset#1 has a fair market value of $5,000,000, a basis for regular tax purposes of $4,000,000, and a basis for alternative minimum tax purposes of $4,750,000. Y also has a minimum tax credit of $310,000 from 1995. Y has no other assets, no net operating or capital loss carryforwards, and no business credit carryforwards. In 1996, Y's only transaction is the sale of Asset #1 for $5,000,000. Therefore, Y has net recognized built-in gain in 1996 of $1,000,000 ($5,000,000−$4,000,000 = $1,000,000) and a tentative tax under paragraph (a)(3) of § 1.1374-1 of $350,000 ($1,000,000 × .35 = $350,000, assuming a 35 percent tax rate). Also, Y's tentative minimum tax determined under paragraph (b) of this section is $47,000 [$5,000,000−$4,750,000 = $250,000−$15,000 ($40,000 corporate exemption amount −$25,000 phase-out = $15,000) = $235,000 × .20 = $47,000, assuming a 20 percent tax rate]. Thus, Y may use its minimum tax credit in the amount of $303,000 ($350,000−$47,000 = $303,000) to offset its section 1374 tentative tax. As a result, Y's section 1374 tax is $47,000 ($350,000−$303,000 = $47,000) in 1996 and Y has a minimum tax credit attributable to years for which Y was a C corporation of $7,000 ($310,000−$303,000 = $7,000).