Converting from a C Corp to an S Corp: Tax Considerations

– S corporations that were previously C corporations may be subject to built-in gains tax on appreciated property if recognized within 5 years.
– S corporations with passive investment income exceeding 25% of gross receipts and accumulated earnings and profits from C corporation years may be subject to a special tax.
– C corporations using LIFO inventories may have to pay tax on benefits derived from LIFO if they convert to S corporations. 1. Unused net operating losses in a C corporation cannot be used to offset income in an S corporation or passed through to shareholders.
2. Switching from C to S status may result in limitations on tax-free fringe benefits for shareholder-employees and complications for shareholders with outstanding loans from their qualified plans.
3. There are strategies for minimizing tax problems and avoiding pitfalls related to switching from C to S status, but the effectiveness of these strategies depends on the company’s specific circumstances.

Tax issues to assess when converting from a C corporation to an S corporation