C corp to S corp and accounts receivable

Mar 31, 2011
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Hi, all

I own 50% of a C corporation which has been established a few years and does taxes on a cash basis. I'd like to convert to an S corporation for 2011 (I know it's past the deadline - I'll late-file the election). Here are the pertinent details:

- Retained earnings as of Dec 31 2010 will be somewhere near zero
- We own no real property
- Accounts receivable as of Dec 31 2010 are around $170,000
- Accounts receivable at the end of 2011 should be around $150,000

We meet all the requirements to convert to an S corp. The one thing I've not been able to wrap my mind around is the built-in gains tax and accounts receivable. Anyone care to explain to me how this will work in my case?


Apr 2, 2011
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You could potentially have a built-in gains tax ("BIG Tax") on both the assets and accounts receivable. Regarding the assets, the rules state that if you dispose of an asset within 10 years of converting from a C to S Corp, you must determine your gain and pay taxes at the highest corporate rate, which is currently 35%. There has been some temporary tax relief that shortens this period from 10 to 1 year for 2011 gains. Unless there is further legislation, it will revert back to 10 year holding period for 2012 gains. Therefore, since the conversion hasn't happened, you would not be able to take advantage of the 1 year holding period, since this 1 year holding period would not be valid until 2012.

The story is similar regarding account receivables. You would have a built in gain at the highest rate as the receivables are collected.

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