Converting C
Corporation to S Election 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 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.
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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