Q-1:

Subject: C CORP TO S CORP

 

HI

I HAVE A SIMPLE QUESTION REGARDING CHANGING C CORP TO AN S CORP THAT HAS REAL ESTATE PROPERTY ALREADY DEPRECIATED OVER THE YEARS.

THIS C CORP HAS 6 STOCKHOLDERS RETIRED AND WISH TO DO WHAT IS RIGHT FOR THEIR CHILDREN

THIS C CORP HAS SEVERAL PROPERTIES VALUED AT  4,000,000 (estimated, not appraised)

IF THE CORP. IS CHANGED FROM A C TO AN S DO THE STOCKHOLDRES, OR THE CORP. HAVE TO PAY TAXES NOW  ON THE CURRENT MARKET VALUE OF THE PROPERTIES EVEN IF THE PROPERTIES ARE NOT SOLD NOW.

IF THERE ARE TAX IMPLICATIONS, HOW MUCH TAX WILL BE DUE

THANKS FOR YOUR HELP

A-1:

You definitely need to be working with a tax pro on matters such as this.  In fact, you should have been working with one from before you even set up your C corp.

You are obviously referring to the 35% Built-In Gains (BIG) Tax that comes into play with appreciated assets in C corps that are converted to S status.  That tax isn't payable at the date of the conversion.  It's payable when the asset is sold, if that happens within 10 years after the date of the S election .

Planning for this can be tricky, especially depending on any future sale plans for the property.  You all, along with your professional tax advisors, need to take a serious look at the wisdom of converting the existing C corp to an S instead of just starting up a new S corp and leaving the existing C corp as is.  You didn't mention any rationale for doing the conversion, so I have no idea what is behind that plan.  Too many people jump into S corps just because they've heard it's the "cool thing" to do or because they heard of someone else doing it, without fully investigating all of the related ramifications.  This is why I posted the comparison of C and S corps on my website several years ago.

Another strategy that is often applied is to have the C corp sell the property before converting to S status so as not to have any potential BIG tax.

You may also be interested in this article I came across recently, explaining that S corps provide less lawsuit protection for assets than do C corps or LLCs.

I hope this helps.  A tax pro can better apply these concepts to your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

 DEAR KERRY

THANK SO MUCH FOR YOUR PROMPT REPLY

IF I MAY TROUBLE YOU JUST ONE MORE TIME

MY FATHER-IN IN LAW AND HIS PARTNERS ARE ALL OVER 80 YEARS YOUNG AND I AM THE ONE THEY TRUST TO GIVE THEM A LOGICAL AND ACCURATE ANSWER ON THIS MATTER.

SINCE WE ARE TALKING ABOUT 6 partners and THE CHILDREN (HEIRS ARE 11 + SPOUSES)

IT IS VERY PROBABLE THIS INCOME PRODUCING COMMERCIAL PROPERTY WILL NOT BE MANAGED IN THE FUTURE WITH SO MANY PEOPLE HAVING THEIR OWN IDEAS.

THEREFORE, I WILL LIKE TO NARROW THE POSSIBILITIES AS FOLLOWS AND PRESENT THE SCENARIO THE THE STOCKHOLDERS AND THEN GO ABOUT GETTING A TAX PRO AS YOU SUGGESTED TO GET THIS TASK DONE.(if you can, you can refer us to a pro?)

==============THE PROPERTY IS DEPRECIATED TO $0.00================

EX#1 THE C CORP IS NOT CONVERTED TO S

          THE PROPERTY WORTH TODAY 4,000,000 IS SOLD NOW---HOW MUCH DOES THE CORP PAY IN TAXES AND HOW MUCH DO THE STOCKHOLDERS PAY IN TAXES

EX#2 THE C CORP IS CONVERTED NOW TO AN S CORP AND THE PROPERTY IS SOLD IN THE NEXT TWO YEARS FOR 4,000,000 -- HOW MUCH DOES THE CORP PAY IN TAXES AND HOW MUCH DO THE STOCKHOLDERS PAY IN TAXES

EX#3 THE C CORP IS CONVERTED NOW TO AN S CORP AND THE PROPERTY IS SOLD 12 YEARS FROM NOW (over the 10 yr clause)  FOR 4,000,000-- HOW MUCH DOES THE CORP PAY IN TAXES AND HOW MUCH DO THE STOCKHOLDERS PAY IN TAXES.

THANKS A GAIN FOR ALL YOU HELP

SINCERELY

A-2:

There is no way to accurately answer any of those questions without analyzing all of the details, including the owners' personal tax situations.  Taxes are based on several factors, including what other income and losses they may have.

To work out the best solution for everyone's particular circumstances, you all really need to work with a tax pro who can help you set up a strategy that will work for all of you.

I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

Unfortunately, we don't have anyone else to whom we could refer you. If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.

Good luck.

Kerry Kerstetter
 

Follow-Up:

thank you very much 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/06/2006 03:21:00 PM Send this post: