February 8, 2013
If you have an “S” corporation that used to be a “C” corporation and you are thinking of selling all or part of your business assets, 2013 would be a real good time to close the deal.
A sale of assets by an “S” corporation that used to be a “C” corporation during the “recognition period” is subject to a built-in-gains tax. A built-in-gain tax is imposed on the corporation, at the highest corporate tax rate, on the appreciation in asset value that existed on the date the corporation became an “S” corporation. The shareholders may then be subject to a second tax on distribution of the sales proceeds.
This “double tax” created by imposition of the built-in gain rules can be eliminated if the corporation holds and sells assets only AFTER the recognition period has expired. But the longer the recognition period is, the tougher that is to do.
The recognition period used to be 10 years. This can be an awfully long time to hold assets. Several years ago Congress recognized this and reduced the recognition period temporarily to 5 years. The recognition period was set to return to a 10 year period after 2012. But the recently enacted 2012 Tax Relief Act extended the 5 year recognition period to cover all sales that take place through the end of 2013. That means you can sell assets in 2013 that you have held at least 5 years without triggering built-in gains tax.
If you have any questions about built-in-gains tax please call or email me at 937-223-1130 or Jsenney@pselaw.com
AND ONE MORE THING. Don’t forget, the new special additional 3.8% Medicare Tax imposed on net investment income is subject to the Estimated Income Tax Provisions. This 3.8% Medicare tax is one of the taxes that is included in computing the penalty for underpayment of estimated tax under Code section 6654(f). Taxpayers who expect to be subject to this 3.8% Medicare tax need to take this tax into account when calculating estimated tax payments. If you have questions concerning the 3.8% medicare tax and whether you are subject to such tax, please call or email me at 937-223-1130 or Jsenney@pselaw.com.