Advisors to a changing
and complex world
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Does it Make Sense to Switch Your Business From a C
Corporation to an S Corporation?
There are two forms of
corporate business ownership for tax purposes—C corporations and S
corporations. A C corporation generates income that is potentially
subject to income tax at two levels. An S corporation generally pays
no federal income taxes on the corporate level.
If you are considering converting your business from a C
corporation to an S corporation, be wary of the following:
- Carryover Losses.
When a C corporation converts to an S
corporation, unused operating losses the C corporation has cannot be
used by the new S corporation to offset its future income.
- Built-In Gains.
An S corporation may have to
recognize built-in gains on assets that were held as a C
corporation.
- LIFO Inventories.
If your C corporation uses the LIFO
inventory accounting method, you may be subject to a one-time tax
liability on the benefits derived from this method.
- Passive Income.
If you convert your business to an S
corporation and its passive investment income exceeds 25 percent of
your gross receipts, your passive income may be subject to a 35
percent corporate level tax.
Source: Jim Ellis, Ellis & Associates, CPAs, P.A.
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