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Plan Ahead
to Reduce Tax
Unexpected S Corp Tax |
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 gains that are recognized in the 10-year period following the conversion. | 
| | S corporations Defined An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax -- other than tax on certain capital gains and passive income. On their tax returns, S corporation shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss. --Source: The IRS | The built-in gains (BIG) tax rate 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, consult 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 be able to reduce the firm's taxable income to zero for the year built-in gains are recognized. 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.
For more information about this topic or Stambaugh Ness's extensive Tax Services, you may visit the Stambaugh Ness website or contact Tax Advisor Colette Brownson or Tax Specialist Melissa Myers at 717-757-6999/800-745-8233. You may also contact either of them by using the contact form below. |
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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. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. 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.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. |
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