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Farm Estate and Succession Planning

RSS By: Andrew Zenk

This blog focuses on making complex and difficult topics in estate and business planning understandable and applicable to the reader.

Andy is an Agribusiness Consultant for AgCountry Farm Credit Services, Fargo N.D., a farmer owned cooperative and part of the Farm Credit System serving eastern North Dakota and northwest and west central Minnesota.

Converting to an S-Corporation and Built In Gains Tax

Aug 18, 2011

 

In general, S-corporations are not taxpaying entities, but instead pass through income to their shareholders. Because of this, many times people with a C corporation want to become an S corporation. If a C corporation elects to be taxed as an S corporation, there could be consequences. The “new” S corporation could be subject to a tax known as the “built-in gains tax” on appreciation that arose prior to the corporation’s conversion to an S corporation. The built-in gains tax also applies to gain attributable to property received by an S corporation from a C corporation in a carryover basis transaction.  Basically, the S corporation is taxed at the highest corporate rate (currently 35 percent) on the recognition of all gains that were built in at the time of the S election if the gains are recognized during the recognition period, i.e., the 10-year period beginning on the first day of the first taxable year for which the corporation was an S corporation or the year in which the assets were acquired.
 
What does this mean? If you did a conversion from a C Corporation to an S Corporation, and were to take something out of your corporation prior to the 10 year waiting period, as described above, it will be treated as if you were still a C corporation and you would have negative tax consequences. So, this is something that is crucial to avoid. 
 
Also, if you were to pass away untimely during the 10 year waiting period, your heirs would still be subject to the 10 year waiting period. There is no basis adjustment for assets held by the S-corporation itself. Basically, because the basis of the assets held by the S-corporation is not affected by the death of a shareholder, a subsequent disposition of an asset giving rise to the built-in gains tax would not be affected as well. 

 

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Disclaimer: The information contained in this publication provides a general overview on various topics and is strictly for informational purposes only. The reader should consult a qualified professional for advice based on his/her specific circumstances. AgCountry Farm Credit Services and the writer of this blog make no representations as to the accuracy or completeness of any information on this site or found by following any link on this site, and shall not be liable for any errors or omissions herein or for any losses or damages resulting from the display or use of this information. 
 
Required Disclosure Pursuant to IRS Circular 230: Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code; or (2) promoting, marketing or recommending to another party any transaction or matter addressed in this communication.
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