Our NYC tax and accounting firm, MEDOWS CPA, PLLC is dedicated to helping our clients understand and benefit from the latest tax reforms. Please contact our NYC CPA team in regard to this information. 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 an S corporation sells, during the recognition period, 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. Our experienced NYC CPAs can help you implement a sound strategy to address these issues during a tax planning appointment.
The recognition period was initially reduced by the American Recovery and Reinvestment Tax Act of 2009 if the seventh year in the ten-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 ten-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.
MEDOWS CPA, PLLC can assist you in taking advantage of this tax savings opportunity. Please call our New York City tax and accounting office at your earliest convenience to discuss your options.