Built-in Gains Tax
The Tax and Accounting office of Certified Public Accountant can assist you in choosing the right legal form for your business. Choosing the proper business entity is a complex matter, which should be handled by an accountant professional. Many C corporations who are tired of the double taxing drawback – income is taxed to the corporation as it is earned and then again to you personally wh
en it is paid out in compensation or dividends – choose to covert to an S corporation. However, in trying to avoid this double tax predicament, business owners might run into built-in gains tax.
The built-in gains tax can blindside business owners who convert from a C corporation to an S corporation. In some cases, the conversion may not even be worth the price of admission. Nevertheless, with some advance planning from a professional certified public accountant, you may be able to minimize the impact of the built-in gains tax or discover additional tax benefits through a C corporation continue with you current business structure.
A corporation may owe income tax at regular income tax rates on a net recognized built-in gain occurring within the 10 years following a conversion to S corp status. The amount of the tax is based on the difference between the fair market value of property sold or otherwise disposed of and the basis of the property at the time of the conversion. The built-in gains tax generally applies to a corporation if:
- It was a C corporation prior to the S corporation election
- The election was made after 1986
- It has a recognized built-in gain within the 10-year recognition period; and
- The net recognized built-in gain for the tax year doesn’t exceed the net unrealized built-in in gain minus the net recognized built-in gain for prior years in the recognition period (to the extent such gains were subject to tax).
The built-in gains tax is computed by applying the highest corporate tax rate to the S corp’s built-in gain for the year. Currently, the top tax rate is 35%.
Nevertheless, the situation may not be as awful as it appears. For starters, any net operating loss (NOL) carryforward in a year in which the corporation was a C corporation may be deducted against the net recognized built-in gain of the S corporation. In addition, your firm may use capital losses carried forward from prior years to offset the built-in gains tax. Finally, excess business credits carried over from prior years may reduce the tax liability on built-in gains.
If you are contemplating a switch to S corporation status, it is important to have a professional accountant evaluate your situation and provide you with an in-depth analysis. Tax law is an extremely complicated area, especially the tax rules concerning a conversion from a C corporation to an S corporation status. Take advantage of a tax expert, like Emil Estafanous, CPA and don’t pay extra tax than what the law requires. Contact the Tax and Accounting office of Certified Public Accountant, Emil Estafanous at (562) 868-6333 and he will be glad to provide you with assistance for all your accounting and tax needs.
Plan Ahead: New 1099 rules
The new health insurance legislation imposes significant new tax reporting requirements. In essence, you will have to report most annual payments for goods and services exceeding $600 — including payments to corporations — on Form 1099. Fortunately, the new 1099 rules will not be in effect until 2012. This gives you plenty of time to adjust your accounting procedures and prepare for the strike of new paperwork.
Under current law, a business must report on Form 1099 compensation (commissions, fees, etc.) paid to an individual, such as an independent contractor, if the annual amount exceeds $600. The same rule applies to interest, rent, royalties, annuities and income items paid to a single recipient.
Both the recipient and the IRS receive a copy of the 1099. It must include the annual amount of the payment, contact information about the recipient and the recipient’s Taxpayer Identification Number (TIN).
However, these reporting rules generally don’t apply to payments made to a corporation. Also, your business doesn’t have to issue 1099s when it purchases goods.
New law changes: Beginning in 2012, the new Patient Protection and Affordable Care Act of 2010 changes the current reporting rules in three ways.
1. Payments to corporations: The reporting exemption for corporations no longer applies.
2. Payments for goods: The reporting requirement is generally extended to payments for property such as merchandise, equipment, raw materials and the like.
3. Payments of gross proceeds: At this point, it’s not exactly clear what “gross proceeds” covers. The IRS is expected to issue guidance shortly.
These three new law requirements will likely affect you on both ends of the spectrum. As a payer, you may have to churn out significantly more 1099s and obtain the TINs of each recipient. As a recipient, you could be bombarded with forms and you must supply the payers with your own TIN.
Tax Specialist, Emil Estafanous, CPA can help modify your business accounting procedures to accommodate the new reporting rules. Do not wait until the last minute to implement changes. Get a head start by calling the Tax and Accounting office of Certified Public Accountant, Emil Estafanous for a consultation.
