Page What s New. Type Here S-Corporation Taxes at the Entity Level 1

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1 Page What s New Type Here 13 - S-Corporation Taxes at the Entity Level 1

2 The PATH Act: A. Permanently limited the recognition period for the BIG to 5 years. B. Temporarily extended the recognition period for the BIG to 5 years. C. Adjusted the recognition period for some taxpayers S-Corporation Taxes at the Entity Level 2

3 Page 257 I. Introduction Finally, the BIG tax stops its endless journey of what am I this year. Five years is the period, well at until congress changes its mind, AGAIN S-Corporation Taxes at the Entity Level 3

4 II. Calculation of the Net Unrealized Built-In Gain (NUBIG) Page 258 C. Presumption of being subject to tax unless: 1. Proving the assets was not on hand on the date of the election. 2. Proving that the appreciation occurred post election. BOTH mean that a detailed appraisal should be in file 13 - S-Corporation Taxes at the Entity Level 4

5 II. Calculation of the Net Unrealized Built-In Gain (NUBIG) Page 259 It is usually about what is not on the balance sheet 13 - S-Corporation Taxes at the Entity Level 7

6 II. Calculation of the Net Unrealized Built-In Gain (NUBIG) Page , S-Corporation Taxes at the Entity Level 8

7 II. Calculation of the Net Unrealized Built-In Gain (NUBIG) Page S-Corporation Taxes at the Entity Level 11

8 VII. Calculation of the Built-In Gains Tax Page 262 Basic Rules Gains and losses are the lesser of the actual gain/loss or the gain/loss at the time of the election The overall tax limit is the smallest of the NUBIG Current year limit, i.e. gains in excess of losses Taxable income limit as if S-Corp was C-Corp 13 - S-Corporation Taxes at the Entity Level 15

9 VII. Calculation of the Built-In Gains Tax Page 263 $4,000+$36,000+$15,000 = $55, S-Corporation Taxes at the Entity Level 16

10 Type Here VII. Calculation of the Built-In Gains Tax Computation of BIG Tax 1. Recognized Built-In Gain $55, Taxable Income as if S election were not made including recognized BIG - assumed 3 Excess of NUBIG over NRBIG for prior years 4. NRBIG (lesser of lines 1, 2, or 3) 5. Net Operating Loss (From C Corp) 6. Capital Loss 7. Total Losses 8. Taxable BIG 9. Tax Rate 35% x Line 8 = BIG Tax $135,000 $130,000 $30,000 $0 Page 263 $55,000 $30,000 $25,000 $8, S-Corporation Taxes at the Entity Level 17

11 VII. Calculation of the Built-In Gains Tax Page 263 The presentation on the tax return H. Report tax on Schedule D and carry to line 22b on Form 1120S I. Any unrecognized BIG is carried over until consumed during 5 year recognition period J. Limit the BIG tax by reducing taxable income on 1120S, i.e. compensation, IRC 179, or retirement plan contributions 13 - S-Corporation Taxes at the Entity Level 18

12 Page IV. Avoiding the BIG Tax B. Recognize built in losses in years of built in gain recognition C. Reduce TI to zero each year D. Don t forget about C-Corp losses and credits E. Defer property sales to after 5 year period 13 - S-Corporation Taxes at the Entity Level 22

13 Page 267 VI. LIFO Recapture Tax Note A taxpayer that is a C-Corp who is using the LIFO inventory when making an S election is subject to recapture To the extent the FIFO inventory exceeds the LIFO inventory valuation, 1/4 on the final C-Corp return and on the next 3 S-Corp returns 13 - S-Corporation Taxes at the Entity Level 25

14 VII. Tax on Excess Net Passive Income Page 269 Occurs when: Corp has pre-s E&P will only affect those corps that were previous C-Corps AND Passive income > 25% of gross receipts 13 - S-Corporation Taxes at the Entity Level 28

15 VII. Tax on Excess Net Passive Income Page When most likely to happen: Owner s sell off operations and collect installment note Passive Income Dividends & Interest Rents Royalties Annuities 13 - S-Corporation Taxes at the Entity Level 29

16 VII. Tax on Excess Net Passive Income Page 271 Other Bad things besides the 35% tax Automatic termination of S status If Excess passive income for 3 consecutive years AND has pre-s E&P each year Can beg for S-reinstatement IRS has been generous Avoiding the Nasty Tax Clean out the old C E&P 13 - S-Corporation Taxes at the Entity Level 33

17 VII. Tax on Excess Net Passive Income Page 272 Significant Personal Services as defined in IRC 469. The operation of an S-Corp will not in itself change the nature of the taxpayer s material participation S-Corporation Taxes at the Entity Level 34