Selling the assets of a C-Corp (often buyers will require an asset sale over a stock sale for a variety of reasons) can result in an ugly double tax situation and the IRS doesn’t let one off the hook easily, instead creating a 10 year period conversion period. The tax paid during that 10 year period is called the Built In Gains (BIG) tax.
However, under the Small Business Jobs Act, if the fifth year of an S Corporation’s recognition period ends before their 2011 taxable year begins, then no tax is imposed on the net recognized built-in gain for the 2011 tax year. For example, if you are the shareholder of a “S” corp which switched from a “C” corp between more than five years ago but less than 10 years ago, you are not subject to the BIG taxes if you sell the assets of your C-Corp in 2011.
It doesn’t seem like there would all that many companies that would take advantage of this. However, I’ve written numerous times in this blog that selling a C corporation is a challenge, and those with C Corporations should seriously consider electing S Corporation status. It seems someone is paying attention to the burden of the BIG tax, so if you haven’t converted, consider doing it now.