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 you decided the S corporation is your preferred choice of entity. How do you change your C corporation into 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, which tax professionals refer to using the acronym BIG.

Why BIG? Because when you hit one of the triggers for the built-in gains tax, you pay double taxes. And the potential for triggering this double tax is embedded for up to the first five years of the newly created S corporation.

For example, say you operate your C corporation on a 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 21 percent.

The remaining 79 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 40.8 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 can help you plan to reduce or (better yet) avoid the BIG tax! Let’s get started. ... Log in to view full article.