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S corporation built-in gain break in stimulus conference bill
February 13, 2009
The strange relief provision for some S corporation built-in gains made it into the conference version of the stimulus monstrosity.
The S corporation built-in gains tax (IRC Sec. 1374) applies a 35% tax when an S corporation takes "built-in gains" into income. "Built-in gains" are items for which a former C corporation had accrued economic benefit on the day its S corporation took effect, but which had not been recognized for tax purposes. For example, if the corporation had a piece of land worth $100,000 on the day it became an S corporation, and the land had a basis of $80,000, there would be a "built-in gain" of $20,000.
The Sec. 1374 tax normally only applies to a corporation's built-in gains taken into income during its first 10-years as an S corporation. The bill (bill Sec. 1251) temporarily reduces this ten-year "built-in gains period" to seven years for built-in gains recognized in 2009 and 2010. For 2009, that benefits corporations that made S elections effective in 2000-2002; in 2010, it would help S elections made in 2001-2003.
Why? Apparently S corporations that made their elections effective from 2000-2003 hold the key to economic recovery.
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