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

or call 1-800-926-7926
Program Materials

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.

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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?

Faculty

Scott A. Harty
Scott A. Harty

Partner
Alston & Bird

Mr. Harty focuses his practice on complex domestic and cross-border commercial transactions, including taxable and...  |  Read More

Immerman, Andrew
L. Andrew Immerman

Partner
Alston & Bird

Mr. Immerman concentrates on federal income tax matters, including domestic and international tax planning and...  |  Read More

Allen Magee, CPA
Allen Magee, CPA

Partner
Dixon Hughes Goodman

Mr. Magee focuses on providing tax compliance and consulting services to public and private companies in a variety of...  |  Read More

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