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  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 firm’s 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 you’re contemplating a switch to S corporation status, talk with your tax adviser 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 firm’s 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 it’s 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.
The drafter of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may any user/recipient of this document use this document’s written tax advice for that purpose. This document’s tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice. Therefore, any user/recipient of this document should seek an independent tax professional’s advice regarding the user/recipient’s particular circumstances.

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

The drafter of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a taxing authority, nor may any user/recipient of this document use this document’s written tax advice for that purpose. This document’s tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice. Therefore, any user/recipient of this document should seek an independent tax professional’s advice regarding the user/recipient’s particular circumstances.

 The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.