Estimated tax tip savings: You can save BIG by understanding how to avoid the evil built-in gains tax that often applies when you convert your C corporation into an S corporation.
Let’s say that you have decided the S corporation is the choice of entity for you. And let’s say further that you currently operate as a C corporation.
How do you change from a C corporation to an S corporation without paying government-imposed double taxes? You see, the law does not simply let you switch. You need to consider the built-in gains taxes for which tax professionals use the acronym BIG.
Why BIG? Because when you trigger the built-in gains tax, your first tax of this double tax is at the 35 percent rate. And triggering this double tax is simple.
For example, say you operate your C corporation on the cash basis. On the day you convert to the S corporation, your C corporation has patients, customers, or clients who have not paid their bills. Now, because of the conversion, they pay those monies to the S corporation, which collects them as built-in gain receivables subject to the double tax.
The double tax works like this:
The first tax is 35 percent.
The remaining 65 percent of the profits (the untaxed part) that reside in the S corporation now flow through to you, the owner, and tax law imposes taxes on your individual income at tax rates as high as 43.4 percent, depending on the nature of the monies causing the tax.
It’s likely that the BIG double tax has your attention. If so, you will be happy to know that this article helps you plan to reduce or, better yet, avoid the BIG tax! Let’s get started. ... Log in to view full article.