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 $160,000. 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

LIFO recapture tax will be $ 20000 which Magic carpet has to pay while changing the method from FIFO to LIFO.

Magic carpet taxable income will get reduced by $ 20000.