The One Big Beautiful Bill Act (OBBBA) allows the seller of a qualifying small business to not pay Capital Gains Tax on the first $15M in qualifying gains. This new law can provide millions in tax savings to entrepreneurs.
There are many factors that qualify a business to be considered Qualified Small Business Stock (QSBS) which is necessary for the savings. But the biggest stumbling block for many will be converting to a C Corp and holding the stock for the waiting period before selling the company.
To convert from an S Corp to a C Corp, you must revoke your S Corp status by sending a statement of revocation to the IRS. While the process is relatively simple for an existing corporation, it involves careful consideration of the tax implications and shareholder consent.
Steps To Convert Your S Corp
You must secure consent from shareholders who collectively own more than 50% of the corporation’s voting and non-voting stock. It is recommended to document this agreement with a formal Shareholder Resolution.
Mail a signed statement of revocation to the IRS Service Center where you originally filed your S Corp election. The statement must include…
1 – A declaration that the corporation is revoking its S Corp election.
2 – The effective date of the revocation.
3 – The corporation’s name, address, and Employer Identification Number (EIN).
4 – The names, addresses, and taxpayer identification numbers of the shareholders, and the number of shares each holds.
5 – The signature of an authorized person, such as a corporate officer.
The effective date of the change determines your filing schedule. The timing can affect whether you need to file one or two tax returns for the year:
If you file the revocation by the 15th day of the third month of the tax year, the conversion can be effective on the first day of that year. If you file after the 15th day of the third month, the change will take effect on the first day of the following tax year.
Let me leave you with this…
The important considerations and tax implications in this conversion are almost too numerous to list and dependent on your individual circumstances. But some include…
1 – You should carefully consider whether to distribute previously taxed S Corp earnings (Accumulated Adjustments Account or AAA) before the conversion. The corporation’s post-termination transition period allows a limited time to make cash distributions tax-free, but any remaining AAA essentially disappears afterward.
2 – As a C Corp, the company’s profits will be taxed at the corporate level, and any dividends distributed to shareholders will be taxed again at the individual level. This is the most significant tax difference compared to an S Corp’s pass-through taxation.
Most C Corp Owners take a larger salary to not pay most of the taxes a second time, but this also increases their payroll tax burden.
3 – An S Corp that has converted from a C Corp is subject to a Built-In Gains (BIG) tax on any appreciated assets it sells within ten years of its S Election. It is critical to do a consultation to understand how this impacts a conversion back to a C Corp.
4 – After converting to a C Corp, the company generally must wait five years before it can elect S Corp status again.
I know how complicated this is. It’s challenging even for someone like me who does this for a living.
That’s why I wrote three columns about it, but the potential tax savings when selling a business are huge.
If you’re thinking about selling your business in the reasonably near future, then we should probably do some planning. It could make a big difference in your retirement.
If you have questions, you know my number.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Sincerely yours,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
888-310-0300
www.SalarySolutions.net
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.