Taxing times blog header

Shorter Built-in Gains Period for S Corporations

By Amanda Wilson on Dec 22, 2015 |


New law ahead road signBy:  Amanda Wilson

An S corporation is a popular tax vehicle, as it allows for a single layer of tax instead of the double layer of tax imposed on regular corporations.  Instead of the S corporation paying tax, the taxable income of the S corporation passes through to the shareholders and is reported on the shareholders’ personal tax returns.  The S corporation can generally then distribute the accompanying profits to the shareholders free of federal tax.

To avoid corporations converting to S corporations and then selling their assets (thereby taking advantage of the single level of tax imposed on S corporations), the Internal Revenue Code imposes a 10 year built-in gains tax on S corporations.  If an S corporation sells assets within this 10-year period, it pays the normal corporate level tax to the extent any of the gain on the sale was already built-into the asset at the time it made the S election.  For example, assume a corporation has an asset with a fair market value of $10 at the time it converts to an S corporation.  If the corporation later sells the asset for $12 within the 10 year built-in gain period, the S corporation would pay corporate level tax to the extent that it had gain attributable to the first $10 of the sales price.

On Friday, legislation was enacted that permanently reduced the 10-year period to 5 years.  This change is retroactive to tax years beginning on or after January 1, 2015.  This change is great news for S corporations!

Other Congress International IRS path act S Corporation Tax