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Seven-year S corporation built-in gains tax recognition period applies for 2009 and 2010 (MS Word)
Seven-year S corporation built-in gains tax recognition period applies for 2009 and 2010 (.pdf)
Seven-year S corporation built-in gains tax recognition period
applies for 2009 and 2010
Dear Reader:
Your corporation elected S corporation status for the 2002 tax year.
At that time, I informed you about the effects of the built-in gains
tax that may apply when appreciated assets held by the corporation
at the time of the conversion are disposed of within the 10-year
recognition period.
Although an S corporation is normally not subject to tax, where a C
corporation converts to S corporation status the tax law imposes a
tax at the highest corporate rate (35%) on the net built-in gains of
the corporation. The idea is to prevent the use of an S election to
escape tax at the corporate level on the appreciation that occurred
while the corporation was a C corporation. The tax applies to the
lowest of the following:
(1) the amount that would be the taxable income of the S corporation
for the tax year taking into account only recognized built-in gains
and recognized built-in losses;
(2) the corporation's taxable income for that tax year; or
(3) the excess of the net unrealized built-in gain over the net
recognized built-in gain for earlier tax years during the
recognition period.
For tax years 2009 and 2010, the American Recovery and Reinvestment
Act of 2009, which was passed by Congress as part of the stimulus
package, has shortened from 10 years to 7 years the period during
which the built-in gain tax is applicable. Accordingly, the
recognition period ends at the beginning of the 2009 tax year if the
S corporation election was made for the 2002 tax year, and the
recognition period ends at the beginning of the 2010 tax year if the
S corporation election was made for the 2003 tax year. Since your
corporation is a calendar year taxpayer, the built-in gain period
has ended for the corporation and you can make dispositions during
2009 and 2010 without being concerned about the built-in gains tax.
Although the built-in gains tax will generally not apply to your
corporation, it may still apply to any assets that your corporation
acquired from a C corporation in a carryover basis transaction
during a post-2002 year.
If you have any questions regarding the application of the built-in
gains tax, please call.