Built-in-Gains Provisions in C-to-S Corp Conversions: Avoiding Double Taxation Through BIG Planning

Description

Converting from C corporation to S corporation status can benefit many companies from tax and operation standpoints. C corporation owners can convert their company to an S corporation without triggering an immediately taxable transaction in most cases. However, several potential tax traps can arise in a conversion if not properly planned. One of the most frequent and costly tax implications of a C-to-S conversion is the BIG tax.

Taxable BIG occurs when an S corporation sells or distributes certain specified assets within five years after its conversion date from C corporation status, or when a converted S corporation acquires assets with a carry-over basis from a predecessor C corporation. Because the BIG tax is imposed at the top tax rate for corporations, tax advisers should look closely at asset planning before completing the S corporation conversion.

In planning for and reporting a C-to-S conversion, tax advisers must account for net unrecognized BIG as well as built-in losses. IRC Section 1374 provides for a netting mechanism to potentially lessen the impact of the BIG tax. Additionally, planners can utilize carryforward C corp attributes to minimize BIG tax.

Listen as our experienced panel provides comprehensive guidance on the calculations, risks, and planning opportunities involved in minimizing or eliminating the BIG tax in a C-to-S corp conversion.