As you consider converting your C corporation into an S corporation, understand and plan for the built-in gains (BIG) tax.
The tax code imposes the BIG tax on S corporations that recognize gains on assets that the C corporation held at the time of S corporation conversion. Some gains can surprise you because on the date of conversion, the law makes you convert your accounting to the accrual method.
Example. Your C corporation operates on a cash basis and has receivables at the time of conversion. Your new S corporation operates on a cash basis. But as it collects the receivables, it faces the BIG tax.
Here’s a breakdown of the BIG tax: The first tax is 21 percent—the C corporation rate. The S corporation passes the remaining 71 percent of profits to you, where they are subject to individual income tax rates, which can be as high as 40.8 percent.
To help you navigate and potentially avoid the BIG tax, here are five strategic approaches:
If you want to discuss the BIG tax, please call me on my direct line at 408-778-9651.