Small Business Jobs Act Alters S Corporation Built-In Gain Period
The Small Business Jobs Act (SBJA) was signed into law by the President on September 27, 2010. Historically, a C corporation that converted to an S corporation would generally have to hold any appreciated assets for 10 years following the conversion or, if disposed of earlier, pay tax on the appreciation at the highest corporate level rate (currently 35 percent). The American Recovery and Reinvestment Act of 2009 (2009 Recovery Act) temporarily shortened the usual 10-year holding period to seven years for dispositions in tax years beginning in 2009 and 2010. The SBJA further shortens the holding period to five years in the case of dispositions in any tax year beginning in 2011, if the fifth year in the recognition period precedes the tax year beginning in 2011.
The built-in gains tax prevents C corporations from avoiding corporate level tax on the disposition of appreciated assets it acquired while a C corporation by first converting to S corporation status. The five-year period in the SBJA refers to five calendar years from the first day of the first tax year for which the corporation was an S corporation.