Hidden Gem in New Tax Law – S Corporation Built-In Gain Recognition Period Reduced to 5 Years

by Gary Michel

More details of the American Taxpayer Relief Act of 2012, which President Obama signed into law yesterday, January 2, 2013, will be release shortly.  But in the meantime, we know from the text of the legislation (HR 8) that the built-in gain (BIG) recognition period for S corporations has been shortened to five years again for transactions taking place in tax years of the S corporation beginning in 2012 or 2013.  While this gem of a provision will sunset after 2013, it was made retroactive to 2012.

As a result of the new legislation, the BIG tax liability you thought your client had in 2012 may be eliminated.  And if your S election became effective before 2009 and a sale of assets by the S corporation occurs in 2013 after the expiration of the new 60-month recognition period, you may avoid the 35% BIG tax as well.  Care of the timing of 2013 transactions is now very important, and techniques should be employed to defer the closing until the new recognition period has expired.

Therefore, despite the new tax law’s increase in tax rates for individuals (both the income tax and capital gains tax rates, as well as the imposition of the new 3.8% Net Investment Income Tax for shareholders who do not materially participate in the business of the S corporation), your S shareholder clients may experience a net decrease in taxes for 2013 transactions when compared to prior years because of the elimination of any liability for the 35% BIG tax.