Avoiding Tax Pitfalls in C Corp to S Corp Elections: Built-in-Gains, Earnings and Profits, Passive Income, and Other Issues

Recording of a 110-minute CPE webinar with Q&A


Conducted on Thursday, June 15, 2017
Recorded event now available


This webinar will equip tax counsel and advisers with the tools to advise C Corporation clients of the benefits and potential tax drawbacks of terminating C Corp status in favor of making an S election. The panel will dissect the necessary considerations involved and outline ways to minimize potentially negative tax consequences involved in an S conversion.

Description

Converting a C Corporation to an S Corporation often provides benefits to owners of closely held businesses. However, there are several factors that advisers must consider when counseling clients on the tax consequences of an existing entity making an S election. Although S Corporations can provide significant tax advantages over C Corporations, there are potentially costly tax issues that must be addressed before converting from a C Corporation to an S Corporation.

A potential tax trap in converting from a C to an S Corporation is the built-in gains tax under Section 1374. If a converted S Corporation sells appreciated property within a 5-year period after S election, the gains are taxed at the entity level at 35%. The built-in gains tax applies to goodwill, so disposition of the assets of the company as a going concern within the 5-year period generates a corporate level tax.

Also, converted S Corporations are subject to a corporate level tax if their passive investment income exceeds 25% of their gross receipts and they have accumulated earnings and profits from the C Corporation. If the corporation owes this tax for three consecutive years, the S election will be terminated.

Listen as our panel of experienced practitioners offers detailed best practices to make tax-efficient conversions from C Corp to S Corp election status, providing you with valuable planning tools to prepare clients for a seamless S election of an existing entity.

Outline

  1. Tax efficiencies and limitations of an S Corporation conversion
    1. Elimination of corporate layer of tax
    2. S Corporations and LLCs
  2. Pre-conversion factors to consider in advising clients
    1. Built-in gains tax
    2. Tax on excess passive income
    3. Tax on certain accumulated earnings and profits
    4. Treatment of existing corporate net operating losses
  3. Planning opportunities
    1. Timing of disposition of Section 1374 assets
    2. Pre-conversion distribution of earnings and profits

Benefits

The panel will address these and other relevant questions:

  • When is conversion to an S Corporation more beneficial than a liquidation and re-incorporation into an LLC?
  • What are the major tax traps that must be identified before converting from a C Corporation into an S Corporation?
  • What steps can a C Corporation take prior to conversion to minimize or eliminate negative tax consequences from an S election?
  • What calculations must a C Corporation make on assets and goodwill prior to making an S election?
  • What implications may a conversion to an S-Corporation have in a subsequent disposition of the business?

Learning Objectives

After completing this course, you will be able to:

  • Recognize the pitfalls of making a S election
  • Indicate when the built-in gains tax will be imposed
  • Determine when passive net income under IRC Sec 1375 occurs
  • Identify the requirements under IRC Sec 531 accumulated earnings tax
  • Indicate the asset tax treatment under IRC Section 1031

Faculty

Scott A. Harty, Partner
Alston & Bird, Atlanta

Mr. Harty focuses his practice on complex domestic and cross-border commercial transactions, including taxable and tax-free mergers and acquisitions, joint ventures and corporate restructurings. He has substantial experience advising corporate and private clients on all facets of U.S. inbound and outbound investments, including treaty planning, due diligence in acquisitions, investments in U.S. real estate, Subpart F and withholding tax issues arising under FATCA. He also represents clients in tax controversy matters through the audit process and administrative appeals, including the negotiation and settlement of taxes and civil penalties. He handles tax audits for public and private companies, income and gift tax audits for individuals and cases with significant offshore trust and foreign corporate tax issues. 

L. Andrew Immerman, Partner
Alston & Bird, Atlanta

Mr. Immerman concentrates on federal income tax matters, including domestic and international tax planning and transactional work for joint ventures, partnerships, limited liability companies and corporations. He has helped structure many sophisticated partnership and limited liability company transactions and has represented the target or the acquirer in numerous corporate mergers and acquisitions.

Allen Magee, CPA, Partner
Dixon Hughes Goodman, Atlanta

Mr. Magee focuses on providing tax compliance and consulting services to public and private companies in a variety of industries, including manufacturing, distribution, automotive dealerships, restaurant groups, real estate, and technology companies. His public company practice focuses primarily on tax consulting and compliance surrounding income tax issues facing multi-state and consolidated corporate groups. He also has extensive experience assisting clients in the preparation of quarterly and annual estimated tax accruals (ASC 740). He also concentrates his tax consulting and compliance experience in dealing with the income tax flow-through entity issues for multi-state S corporations, partnerships, and their respective investors. He has extensive experience in assisting many private businesses with the tax planning issues related to selling their businesses to outside investors.


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Director of Multistate Tax Services

Deloitte Tax

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Avalara

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Grant Thornton

Elizabeth Bowman

Tax Research Analyst

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Manager of Domestic Taxes

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Joseph Calianno

Partner, National Tax Office International Tax

BDO

Stephanie Anne Lipinski-Galland

Partner

Williams Mullen

John Garippa

Senior Partner

Garippa Lotz & Giannuario

Joseph Geiger, Esq., CPA

Tax Consultant

Vertex

Kenneth Graeber

VP & Management Consultant

Marvin F. Poer & Co.

Don Griswold

Executive Tax Counsel

Berkshire Hathaway Tax Group

George Manousos

Partner

PricewaterhouseCoopers

Diane Matulich

Senior Manager, Local Taxes

Advanced Micro Devices

Betty McIntosh

Senior Managing Director

Cushman & Wakefield

Foy Mitchell

Vice President

Marvin F. Poer & Co.

Walter Pickhardt

Partner

Faegre Baker Daniels

Richard Pomp

Professor of Tax Law

University of Connecticut

Richard J. Prem

Vice President, Indirect Taxes & Tax Reporting

Amazon.com

Michael Press

President

Scout Economics

Tammy Propst

President

taxadvantagegroup

Mark Semerad

Manager of Property Tax

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