tax considerations       


File A Sub-S Election


Though it does satisfy a C-Corp owner’s current desire to sell and eliminate the prospect of double taxation, filing a Sub-S election will alleviate a substantial portion of the tax burden should a sale be executed at some point in the future.

One thing to keep in mind when considering a Sub-S election is the Built In Gain associated with the C-Corp prior to filing. If the owner is considering an exit strategy within the first few years of the S-Corp election, it is critical that the C-Corp be valued correctly just prior to the election.

Why is this important? Should the new S-Corp sell to a third party at anytime prior to the IRS mandated ten-year look back period, the difference between the ultimate sale price and Built In Gain would be taxed individually by the shareholder at the shareholders effective income tax rates. The corporation may have to pay tax itself on the Built In Gain that was attributable to the original C-Corp. (See IRS Code Sec. 1374) However, the shareholder would pay substantially less tax due to the fact that all post Sub-S election gain is taxed only by the shareholder.

Regardless, most small cap companies should speak with their tax advisors about the prospect of an S-Corp election.