"KJ Nichols, CPA" <knichols[at]rfoods.com> wrote:
- quote -

Thanks for your response. So lets say the current basis
(cost - accumulated depreciation) is 50K. At the time of
conversion from C to S (which is when, BTW -- the date of
the request, or the date of IRS approval?) the appraised FMV
is $75K. Some years later (< 10) the property is sold for
$90K.

Then, nothing is paid until the asset is sold (< 10 years).
At that time, tax is calculated on $75K - $50K at corporate
rates as if there were no other income (i.e. 15% of $25K).
This tax is then counted as a deduction & passed pro-rata to
the (now S-corp) shareholders as usual in a Sch K.

So what happens to the other $15K (increase from FMV at
conversion to final sales price)? Presumably, its taxed at
the usual individual rates, with the cost basis adjusted
from the FMV for depreciation. Does the length of ownership
(which determines capital gains rate) start way back when
the original C corp acquired the asset, or when the
conversion was made? IOW, would a conversion to S corp
followed by sale in the same year make the proceeds liable
for short-term gains rate?

And finally, if the sale were made 11 years after the
conversion, tax would be on the $90K-$50K at the LTG rate.

It would seem, then, that there is NO immediate tax
consequences in converting appreciated real-estate. Is my
understanding correct?

- quote -

This suggests that a NOL can be resurrected even after the
C-corp is no more. If there is a $10K NOL, in the example
above, does this reduce the corporate tax bite to 15% of
$75K - $50K - $10K ?

- quote -

Surely there must be an implicit distribution at conversion
since "retained earnings" doesn't apply to S-corps? Are they
taxed at regular income rates to the S-corp shareholders?
I can't believe the IRS would leave a loophole here!

- quote -

It's not the options I need at this stage, just an overall
understanding. And you're doing a pretty good job at
describing the mechanism.

- quote -

Yes, I see the wisdom in this.

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Tony Cox wrote:

- quote -

The real estate should be appraised at the time of
conversion to fix its fair market value. The built-in gain
will be the FMV less the tax basis in the real estate. This
gain will only be paid if the S corp sells the asset(s)
within 10 years of converting from a C corp. If that
happens, then the tax on the gain is calculated and paid at
the corporate level at corporate rates. The tax is then
deducted form ordinary income or gain on schedule K and the
net gain is passed to the shareholders and taxed again on
Form 1040. After 10 years, the built-in gain tax is no
longer in effect.

The NOL can only be used to offset corporate income so it
will be of little use unless the S corp shows a built-in
gain at some point.

- quote -

The retained earnings remain with the corporation. The C
corp retained earinings may come into play if the
shareholders are taking distributions. You should speak to
someone familiar with S Corp AAA and C corp earnings who
could do a better job of explaining the options than I can
on a message board.

Depending on the size of the NOL, it might be better to
remain a C corp until the only NOL left is about the same as
any anticipated built-in gains.

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Can some kind soul give me an overview of the issues
involved in converting an existing C corporation to an
S corp? The C corp has some appreciated real estate,
a NOL carryover from previous years, no inventory to
speak of, and some retained earnings.

Are the real assets appraised when doing the conversion, and
tax assessed at that point? Or do these assets get treated
differently when eventually sold. Other net resources aren't
too specific on the details.

Since retained earnings have previously been taxed, and
possibly (although not in our case) at anything from 15% to
35%, how do they end up being taxes when transferred to the
individual shareholders? It seems on the face of it that the
whole process is likely to be quite complex!

<< ================================================== ===== > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >