The American Recovery and Reinvestment Act of 2009 provides for a temporary reduction in the recognition period for built-in gains tax. The built-in gains tax applies to the appreciation in certain property held by a C corporation at the exact moment when it converts to S status. If the property is later sold within ten years following the conversion to S status, the appreciation, or “built-in gain,” is subject to tax as if it were a C corporation. If the property were sold at a time after the end of ten years following conversion to S status, the entire gain escapes C corporation taxation, and instead is taxed to the shareholders at low capital gains rates. This period is often called the ten year recognition period.
Section 1251 of the Act reduces the ten year “recognition period” to seven years, but only for taxable years beginning in 2009 or 2010. This means that C corporations who elected S status prior to the recognition period of seven years can avoid built-in gains tax if they sold appreciated built-in gains property during 2009 and 2010.
IRS Circular 230 Disclosure: Although this written communication may address certain tax issues, it is not intended to constitute a reliance opinion as described in IRS Circular 230 and, therefore, it cannot be relied upon by itself to avoid any tax penalties.
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