Built-In Gains Tax (BIG Tax)
Built-In Gains Tax (BIG Tax) built-in gains tax is a special tax provision that prevents corporations from avoiding corporate-level taxes when converting from C-corp to S-corp status.
The tax applies to appreciated assets owned at the time of S-corp conversion if they are sold within a specified recognition period.
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How Built-In Gains Tax Works
When a C corporation converts to S corporation status, the built-in gains tax ensures that appreciation in assets existing at the time of conversion is still subject to corporate-level taxation if those assets are sold within a specified period.
The tax is designed to close a potential tax loophole that would allow companies to escape corporate-level taxes by converting to S-corp status just before selling appreciated assets.
Calculating built-in gains involves comparing the fair market value of assets at the time of S-corp conversion to their tax basis, with the difference potentially subject to taxation at the corporate rate.
Key Points
- •Applies to assets with appreciation at the time of S-corp conversion
- •Currently has a five-year recognition period
- •Taxed at the highest corporate rate (21%)
- •Calculated on a per-asset basis
- •Impacts transaction structuring and sale negotiations
Frequently Asked Questions
Related M&A Concepts
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