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This is part of a series of alerts about tax provisions in President Obama's stimulus bill, officially called the "American Recovery and Reinvestment Act of 2009."
S Corp Built-In Gain Holding Period Temporarily Shortened to Seven Years
Background and Old Law: An eligible corporation may elect to be taxed as an S corporation which, with limited exceptions, isn't taxed at the corporate level. Instead, its items of income, loss, deduction and credit are passed through to, and taken into account by, its shareholders in computing their individual tax liabilities. Where a corporation that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were "built-in" at the time of the election if the gains are recognized during the recognition period. Under pre-Act law, the recognition period was the first ten S corporation years. Gains are not "built-in" gains to the extent they are shown to have arisen while the S election was in effect or are offset by losses.
New law: For tax years beginning in 2009 and 2010, no tax is imposed on the net unrecognized built-in gain of an S corporation if the seventh tax year in the recognition period preceded the 2009 and 2010 tax years. Thus, for the 2009 and 2010 tax years, the recognition period is reduced to seven years.
The recognition period will end at the beginning of the 2009 tax year if the S corporation election was made for the 2002 tax year or sooner and the recognition period will end at the beginning of the 2010 tax year if the S corporation election was made for the 2003 tax year.
If there is an S corporation waiting for the clock to run in order to recognize gain, 2009 may be the year to recognize that gain.
About the Writer
Desmond G. Sheridan is a partner in the Greensboro law firm of Isaacson Isaacson Sheridan & Fountain, LLP and is a certified public accountant. His practice areas are business transactions, tax, corporations, limited liability companies, commercial real estate and estate planning. Sheridan has served on the Board of Directors of the North Carolina Association of Certified Public Accountants and has been recognized as a North Carolina "Super Lawyer" and a member of the "Legal Elite" by Business North Carolina. He has given numerous continuing education presentations to CPAs and attorneys.
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