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S Corporations;

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The Tax Reform Act may make converting to S-corporation status more attractive, but act fast, because some of the benefits will disappear at midnight on December 31. After that, new S corporations will have to go through a new, longer transition period.

The issue arises now that the new tax law drops personal tax rates below corporate tax rates. That adds to the appeal of S corporations, which pay no corporate tax on earnings, but pass them directly to shareholders, who then pay taxes at the individual rate. Many standard (or C) corporations may now want to become S corporations.

To do so, a qualifying company need only file a form with the Internal Revenue Service. Then comes a transition period -- three years, under the old rules -- during which you are still subject to a form of "double taxation." If you sell assets at a gain during this time, you must pay corporate tax on the gains before distributing them to shareholders.

After January 1, the transition time will be 10 years, lengthening exposure to corporate tax liability. This will plug a large loophole, but not, we suspect, before a lot of companies slip through.

Last updated: Dec 1, 1986




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