February 19, 2013
Authored by: Bryan Cave
In general, when an S corporation sells its assets, the gain on sale flows through to, and is reportable by, the shareholders and is not subject to a corporate level tax. In the case of an S corporation that previously was a C corporation, however, such S corporation is subject to a corporate level tax on its “built-in gain” if the asset sale occurs during the “recognition period.”
Generally, an asset’s built-in gain is the amount of gain that would be recognized if the corporation sold such asset immediately before it converted to an S corporation and the recognition period is the first ten years following the conversion to an S corporation. The recognition period was shortened to seven years for sales occurring during a taxpayer’s 2009 and 2010 tax years and to five years for sales occurring during a taxpayer’s 2011 tax year. The recently enacted American Taxpayer Relief Act of 2012 extended this shortened five-year recognition period for any built-in gains recognized during either the 2012 or 2013 tax years. For the 2014 and later tax years, the recognition period will again be ten years, unless legislation to the contrary is passed before then. Thus, an S corporation that converted from a C corporation at least five years ago should consider the tax benefits of an asset sale occurring in 2013 to avoid the corporate level tax on built-in gain.
If you would like to discuss how this matter may affect your bank, please contact a member of Bryan Cave’s Financial Institutions or Tax Advice and Controversy client service groups. We also encourage you to attend our 2013 S-Corp Conference.