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Converting C Corporation to S Election


  Plan Ahead
  to Reduce Tax
  on Unrealized Profits


If your C corporation is thinking about electing S corp status, make sure you plan ahead or you may wind up owing a substantial tax on unrealized profits for the 10 years following the conversion.

The built-in gains (BIG) tax, which can be quite onerous, equals the highest corporate tax rate (currently 35 percent). If your firm is liable, the tax is paid at the corporate level and the gain is taxable again at the shareholder level.

The net built-in gain subject to tax during a year is limited to your firmís taxable income for the year. You carry forward any excess to the next year.

Congress enacted the BIG tax to prevent C corporations from using S corps to avoid the double tax imposed on corporate liquidations.

If youíre contemplating a switch to S corporation status, call us at (856) 665-2121 about analyzing your firm's balance sheet and taking steps to cut the BIG tax down to size. For instance, you can sell loss assets to offset built-in gains or use loss and credit carryovers from your days as a C corporation.

Similarly, you might reduce the firmís taxable income to zero for the year built-in gains are recognized (but the tax will be carried forward to next year).

 Note: Despite the BIG tax and other costs involved in an S conversion, you may find that itís still a tax-wise move to make the switch. But if the BIG tax is especially severe, you might decide to keep operating as a C corporation, at least for the time being. It is critical to engage in both short and long-term planning to keep your tax bill low.


Virtualex.com Ronald J. Cappuccio, J.D., LL.M.(Tax) 1800 Chapel Avenue West Suite 128 Cherry Hill, NJ 08002 Phone:(856) 665-2121      Fax: (856) 665-9005 Email: ron@taxesq.com  
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