The Built-in-Gains Tax (BIG Tax) is an important concept to grasp when it comes to asset sales by companies that have converted from C-corp status to S-corp status. When an S-Corporation sells appreciated assets, such as real estate or depreciated equipment, or goodwill, the BIG tax can come into play. It is a tax on the built-in gains of the assets, which refers to the difference between the fair market value of the assets at the time of sale and their original cost basis. This tax applies to S-Corporations that have converted from C-Corporation status, and it aims to prevent tax avoidance by ensuring that the appreciated value is taxed appropriately.
How it Works
Let’s delve deeper into how the BIG tax works. When a C-Corporation converts into a S-Corporation, it triggers the recognition of built-in gains on the assets held by the company. If these assets are subsequently sold within a certain timeframe (usually within five years), the S-Corporation becomes liable for the BIG tax. This tax is calculated by applying the corporate tax rate to the built-in gains. Essentially, it means that the company will have to pay taxes on the appreciation that occurred while it was still a C-Corporation.
Implications and Planning Considerations
The BIG tax can have significant implications for S-Corporations and should be considered when planning asset sales. It’s important for businesses to carefully evaluate the potential tax consequences before deciding to sell appreciated assets. In some cases, it might be beneficial to defer the sale until after the BIG tax recognition period has passed. This allows the C-Corporation to avoid the additional tax burden associated with the built-in gains. Consulting with tax professionals and experts in business valuation can provide valuable guidance on navigating the complexities of the BIG tax and developing a strategic plan that maximizes tax efficiency.
In conclusion, the BIG tax is a tax on the built-in gains of assets sold by S-Corporations that were previously C-Corporations. It applies to S-Corporations that have previously converted from C-Corporation status and is designed to prevent tax avoidance. The tax is calculated by applying the corporate tax rate to the appreciation in value that occurred while the company was still a C-Corporation. Understanding the implications of the BIG tax and considering it in asset sale planning is crucial for businesses aiming to optimize their tax strategies. This is often an overlooked tax item and is subject to many IRS audits.