New Tax Law Extends Shorter Period for Recognition of Built-In Gains Tax

The American Taxpayer Relief Act (ATRA) made changes in the recognition period for built-in gains taxes for C corporations converting to S status. In the past, the law provided that such companies must pay tax on the sale of appreciated assets for 10 years after conversion. The 2009 tax law provided that for companies that had already begun their recognition period, for any taxable year beginning in 2009 and 2010, no tax will be imposed if the seventh taxable year in the corporation's recognition period precedes one of these taxable years. For tax years beginning in 2011, the recognition period was limited to five years, but just for 2011. The new law extends that provision for 2012 and 2013, meaning companies that have been an S corporation for at least five years at the beginning of the taxable year in 2012 or 2013 will not owe the tax. The 10-year rule will apply beginning in 2014 unless Congress again makes changes.