Converting a “C” to an “S”? Don’t Forget LIFO Recapture

Do you own or operate your business in a “C” corporation?  Does your corporation maintain significant inventory?  Do you maintain your inventory using the LIFI (last-in, first-out) method for federal income tax purposes?  Are you considering making an “S” election?  Well, be sure to consider the cost of the LIFO recapture that will result.

Under IRC section 1363(d)(1), a “C” corporation that maintained its inventory using the LIFO (last-in, first-out) method for its last tax year before an “S” election is effective must include a LIFO recapture amount in its income for its last “C” corporation year.  Likewise, a “C” corporation that transfers LIFO inventory to an “S” corporation must include a LIFO recapture amount in income as of the date of the transfer.

The LIFO recapture amount is the excess of the inventory amount under FIFO (first-in, first-out) over the inventory amount under LIFO as of the end of the last “C” corporation tax year. Any resulting tax is payable in four equal installments over four years. The first installment must be paid on or before the due date for the tax return for the last year the corporation was a “C” corporation. The following three installments must be paid on or before the due date for the corporation’s return for the next three tax years.

Converting a “C” corporation to an “S” corporation can be a very smart move.  But be sure you consider all of the effects.  Give me a call or email if you have any questions about the conversion process or what is the best decision for you, call 937-223-1130 or Jsenney@pselaw.com.

AUTHOR: Jeff Senney
jsenney@pselaw.com


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