S Corporation Sold an Appreciated Asset. Why Is There a Corporate-Level Tax?
Built-in gains tax can preserve corporate-level tax on appreciation that existed before a C corporation converted to S status.
Conversion from C to S
If a C corporation owns an appreciated asset when it elects S status, some of the appreciation was created during the C corporation period.
Later sale
If the S corporation recognizes built-in gain during the applicable recognition period, corporate-level tax can apply under current law.
Why the rule exists
The rule prevents a C corporation from avoiding corporate tax simply by electing S status immediately before selling appreciated assets.
Planning
Conversion date, asset basis, fair value, sale timing, and current recognition-period rules all matter.
The takeaway
Prior C corporation appreciation can remain exposed to corporate-level tax when recognized during the applicable recognition period.
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FAQ
Do all S corporations pay built-in gains tax?
No.
Is prior C corporation status relevant?
Yes.
Does sale timing matter?
Yes.