Built-In Gains Shortened Holding Period Extended By New Tax Bill


Generally, if a corporation converts from a C corporation to a subchapter S corporation, the corporation must hold its appreciated assets for at least 10 years or, otherwise, the corporation must pay taxes (which could be as high as 35%) on any built-in capital gains that occurred before the corporation converted to subchapter S status. The 10-year period is commonly referred to as the built-in gain holding period. The holding period starts from the first day of the first taxable year for which the corporation is an S corporation. For instance, if a corporation converted from a C corporation to an S corporation on July 14, 1996, then the 10-year holding period ends on July 13, 2006.

As a tax incentive, for years 2009 and 2010, Congress shortened the 10-year period to 7 years. For year 2011, the holding period was further shortened to 5 years. Without the new tax bill (H.R. 8), the shortened holding period would have expired, and reverted back to 10 years. As a tax incentive, the new tax bill extended the 5-year holding period for years 2012 and 2013.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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