PATH Act: S Corporation Built-In Gains Tax
The reduced recognition period for built-in gains tax of an S corporation is made permanent for tax years beginning after 2014 by the Protecting Americans from Tax Hikes (PATH) Act of 2015. Therefore, for purposes of computing the built-in gains tax, the recognition period is the five-year period beginning with the first day of the first tax year for which the corporation was an S corporation

An S corporation is a pass-through entity that is treated very much like a partnership for federal income tax purposes. As a result, income is generally passed through to the shareholders and taxed at their individual tax rates.

However, a corporate-level tax is imposed on an S corporation's net recognized built-in gains attributable to assets held at the time it converted from a C corporation to an S corporation. The built-in gains tax also applies if, during the recognition, period an S corporation sells assets that were acquired in a carryover basis transaction; for example, a tax-free reorganization. To avoid the built-in gains tax, the S corporation must not sell the assets during the 10-year recognition period applicable to the assets.

The recognition period was initially reduced by the American Recovery and Reinvestment Tax Act of 2009 if the seventh year in the 10-year recognition period preceded the 2009 or 2010 tax years. Subsequently, the Creating Small Business Jobs Act of 2010 reduced the recognition period if the fifth year in the 10-year recognition period preceded the 2011 tax year. Additional legislation extended the five-year reduced recognition period through the 2014 tax year.

The built-in gains tax can be triggered by downsizing or other business survival decisions, including the disposal of unused assets to raise needed cash. Consequently, the relief provided by the reduced recognition period may be valuable for small family or privately-owned businesses.

We can assist you in taking advantage of this tax savings opportunity. Please contact us at 516-938-5219 or via email at st@st-cpas.com at your earliest convenience to discuss your options.

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visit www.st-cpas.com.