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, call Ronald J.
Cappuccio, J.D., LL.M.(Tax) attorney 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
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.
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