I have a client who is currently a C-Corp and wants to convert to an S-Corp mainly to avoid double taxation.
The corporation is several years old and has high taxable profit and over 350,000 undistributed profit.
Should we convert to an S-Corp if the only/main reason is to avoid double taxation?
Are there any other issues we should be concerned about if we convert to an S-Corp?
asked 09 Oct '09, 18:43
With these high profits you are going to have built in gains taxes but also, all the undistributed profits will show up on the shareholders k-1(s) at the end of the year and would be highly taxed at that amount of income.
I would not even think about it until you at least start paying out these profits in the form of dividends or eat up some of these profits while still a c corporation.
answered 09 Oct '09, 19:56
BIG tax planning is complex and different for every client, so there is no easy answer. I have a ten year excel template that I use, which allows me to calculate the impact of different strategies and scenarios for a client. Here are some things you have to think about:
answered 16 Oct '09, 08:28
Look at the rules under Section 1374 which describes the tax on built in gains which Sandysea is referring to.
Not only could you have a large tax currently, but you have to be able to value your assets at the date of conversion to determine any future built in gains. I would always recommend that my client get a valuation of your assets from a qualified appraiser at the date of the conversion. It will help reduce countless migraine and cluster headaches when you are audited in 10 years because you sold some asset that was on the books at the date of the conversion from C corp to S corp.
answered 13 Oct '09, 00:30
There are basically two considerations in addition to what the corporate exit strategy/ business succession plan is.
1) Earnings & Profits of the C-corporation will be subject to tax at the shareholder level when distributed, but they are currently subject to a 15% tax rate since they were taxed at the corporate level.
2) Corproate income tax on built-in gains at the time of conversion to an S-corporation for the difference between the fair market value of all the assets, including goodwill, and their respective tax bases.
answered 15 Oct '09, 04:11