S Corporation Conversion

A Subchapter C corporation can elect, under certain conditions, to become a Subchapter S corporation. One of the tax-related motivations for this decision rests upon the "built-in gains" taxed on the eventual sale of the company. Under IRC Section 1374, a corporation making an S corporation election must obtain a valuation to determine the built-in gain – the appreciation in asset value from the period of time when the entity was a C corporation – as of the date of the S corporation. C corporations that convert to Subchapter S status require asset valuations to set a limit, in the event that a built-in gains tax is triggered. This is because, if the S corporation subsequently sells any of these assets within the 10-year time period after its conversion from a C corporation (the recognition period), a built-in gain may be realized. This translates to the company being liable to pay the highest corporate level tax rate on the gain as if it were a C corporation within the 10-year waiting period subsequent to the election. The valuation provides a cap on the built-in gain tax.

Delphi has worked with numerous accounting firms in providing valuations for their clients, upon a Company’s conversion to an S Corporation.