C to S Corporation Conversions

A C corporation to S corporation conversion takes place when a C corporation elects to convert its income tax status to that of an S corporation. There are a number of reasons shareholders would make this election, but many advisors would agree that the main incentive is to avoid the second layer of taxes (i.e., the double taxation) on dividend distributions received from the C corporation. If the S corporation is sold or if it sells any of its assets within a certain period of time after the conversion from a C corporation, the current tax code requires that a potential built-in gain (“BIG”) tax be realized on the sale. This BIG tax is based on the unrecognized appreciation in asset value from the period of time when the entity was a C corporation. Accordingly, the fair market value of the entity and its assets as of the effective date of the S corporation election is needed. To compute and document the potential future BIG tax, IRC Section 1374 provides the entity must obtain a valuation on the conversion date. It is essential that a qualified appraiser perform this valuation.


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