New Five Year Rule Provides Built-In Gains Relief to S Corporations

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From 1986 until very recently, a C corporation that converted to an S corporation faced potential double taxation on built-in gain assets (“BIG assets”) for a 10 year period following its S election. The full benefit of electing S corporation status and pass-through taxation was only available after the 10 year period.

In 2009, legislation was enacted reducing the built-in gain period to seven years for BIG assets sold in 2009 and 2010. In the recently-enacted Small Business Jobs Act of 2010, this period was reduced to five years for BIG assets sold in 2011.

This generally means that if a corporation’s S election was on January 1, 2006 or earlier, there will be no corporate level tax on BIG assets sold in 2011.

Unless it is extended, this provision only is valid for this year and the law will revert to the 10 year built-in gains period at the end of 2011. Owners of S corporations with significant built-in gains should consider the tax benefits of selling BIG assets during this time frame.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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