Built-In Gains Tax

Many medium and small companies who operate as corporations choose to be taxed as an S-Corporation. Operating this way eliminates the double taxation (income tax imposed on both net taxable corporate income and subsequent distributions made to shareholders) that corporations would otherwise have. Income taxation at the corporate level can still occur, however. One way this can occur is the built-in gains tax. This is normally incurred when the fair market value of the assets of a corporation exceed their adjusted basis at the S-election effective date, and the newly formed S-Corporation subsequently disposes of any of these assets during a five-year window after the S-election is effective. When a built-in gains tax is triggered, it is taxed at the highest corporate tax rate, which is currently set at 35%.

There are several ways to reduce or entirely mitigate the imposition of this tax:

-Do not dispose of the assets for five years after the S-election effective date.
-Demonstrate that the assets were acquired after the S-election date.
-Utilize Net Operating Losses (NOL) carried forward from the time the Corporation was still taxed as a C-Corporation to offset the recognized gain.
-Demonstrate that the assets appreciated in value after the date the S-election was effective.
-Dispose of assets with built-in losses during the same periods as a disposition of assets with built-in gains to offset taxable income.


If you have any questions, contact Tony Mueller, CPA at 314-576-1350 or tmueller@bwtpcpa.com.

Anthony (Tony) Mueller, CPA is an accountant with BWTP P.C. Read more about Tony here.

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