Computation of tax
(a) Computation of tax. The tax imposed on the income of an S corporation by section 1374(a) for any taxable year during the recognition period is computed as follows (1) Step One: Determine the net recognized built-in gain of the corporation for the taxable year under section 1374(d)(2) and 1.1374-2; (2) Step Two: Reduce the net recognized built-in gain (but not below zero) by any net operating loss and capital loss carryforward allowed under section 1374(b)(2) and 1.1374-5; (3) Step Three: Compute a tentative tax by applying the rate of tax determined under section 1374(b)(1) for the taxable year to the amount determined under paragraph (a)(2) of this section; (4) Step Four: Compute the final tax by reducing the tentative tax (but not below zero) by any credit allowed under section 1374(b)(3) and 1.1374-6.