One of the “stimulus” bills shortened the “recognition period” for S corporation built-in gain tax to seven years for 2009 and 2010 built-in gains. The latest small business tax bill shortened the recognition period to five years for 2011 gains.
The S corporation rules normally require former “C” corporations to pay a corporate tax at 35% on any built-in gains recognized during the “recognition period” that ends ten years after the S corporation election takes effect. A “built-in gain” is an income item that has accrued economically as a C corporation but hits the tax return in the recognition period. For example, if a corporation owns a piece of land that cost $1,000 on the day it becomes an S corporation, and it’s worth $4,000 on that day, there’s a $3,000 “built-in gain” that will be taxed to the corporation if the property is sold for at least $4,000 during the recognition period. The after-tax gain passes through to the shareholders’ K-1s, along with the corporation’s other income items.
A reader found an old post about the stimulus act seven-year built-in gain period and posed this question:
according to above, a corporation that made S election in 2002 would not be subject to built-in gains tax if property sold in 2009. What if S election was made March 1, 2002 (fiscal year end changed to calender year end upon S election)? 7 whole years would not have been completed by beginning of 2009. Would S corp. not be subject to built-in gain?
That’s an excellent question. The built-in gain recognition period is normally ten calendar years, so if an election took effect on March 1, 1996, assets sold through February 28, 2007 would have been subject to the built-in gain tax. The stimulus provision, however, has funny wording:
Special rules for 2009, 2010, and 2011. No tax shall be imposed on the net recognized built-in gain of an S corporation
