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Form 1120-S CPA discusses the 2013 factors in Converting C Corporations to S Corporations

Form 1120-S CPA C Corporation conversion to S Corporationn

Gary Bode, CPA: Plan your C Corporation conversion carefully. (910) 399-2705.

Form 1120-S CPAs hear more talk lately from C Corporations that want to convert into S Corporations. Why?

  • C Corporations incur double taxation. In 2013, the total C Corporation tax rate can be up to 51.25%. Ouch.
  • In 2012, up to a 9.75% tax rate decrease was possible (as an S Corporation compared to a C Corporation). But in 2013 it is only 3.25%.
  • C Corporation assets may have less value than the past. This reduces the impact of the built in gains recognition rule, if incurred, after conversion. Talk to your CPA about it.
  • Personal marginal tax rates of the shareholders increased. Remember high salaries to shareholder employees remain a staple of C Corporation tax management.
  • Employee Social Security tax went back to 6.2%, from 4.2%, on the first $110,000 of income in 2013.
  • Gains on C Corporation qualified dividends increased.
  • For a moment in 2013 the built in gains recognition period dropped from 10 years to five years. And then went back to 10 years.

“Some C Corporation issues extend into the new S Corporation upon conversion. Best to plan carefully.”
– Gary Bode, Form 1120-S CPA

Factors Influencing the C Corporation Conversion to S Corporation Decision

Converting from a C Corporation to an S Corporation has consequences.

  • Will S Corporation conversion even be possible? S Corporations have many restrictions.
  • The shareholder’s personal goals.
  • The length of the built in gains recognition period. Shorter is obviously better. For tax positioning I think a C Corporation would use the 10 year time line although Congress could change that in 2014.
  • The highest Corporate tax rate. It’s prudent to extrapolate your C Corporation’s tax position now and in the future.
  • The shareholder’s marginal tax rate. If it becomes greater than the highest corporate rate, converting to an S Corporation may increase the shareholder’s tax liability.
  • The volatility of tax laws makes planning difficult, although trends exist.

When our C Corporation clients want to convert to an S Corporation we generally run an extrapolated tax returns for both scenarios. We run liquidation scearios as well.

We’re a CPA firm that functions as an S Corporation. But we don’t always recommend converting. Discuss your options with your CPA, or, call us for a free initial phone consult at (910) 399-2705. Our virtual office means we serve you wherever your Corporation functions.

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