Built-In Gains Tax

Your Guide to State, Local, Federal, Estate + International Taxation

The built-in gains tax was originally established in 1986 as a way to prevent C corporations from escaping the double taxation on unrealized gains by electing to be an S corporation. The way it worked was that if a C corporation had any unrealized gains in its assets when it elected S corporation status, it was supposed to track those gains by asset, and if any of the assets were then sold within 10 years of the election, the corporation would pay a tax of 35% of the gain amount.

Over the years, the tax remained unchanged but the recognition period changed a few times. Originally set at 10 years, it was reduced to 7 years and then to 5 years, but only for certain years. The Protecting Americans from Tax Hikes (PATH) Act passed in December of 2015 has permanently (as permanent as anything is in the tax law) set this recognition period at 5 years. This will be a big help in planning for the S corporation election and the timing of assets sales.

Remember, the PATH Act did not do away with the built-in gains tax, it just reduced the recognition period.

As always, consult your tax adviser.

By Rick Schultz, CPA