05/01/2023
This course provided tax advisers and compliance professionals with a thorough exploration of the potential tax benefits and hazards of revoking S elections and converting entities to C corporations. The panel, led by John T. Alfonsi and Marcus E. Dyer, CPA, (JD Principal, Team Leader of Tax Controversy, Withum Smith+Brown), offered tools and strategies to maximize the tax and operational advantages of making an S to C corp election. The panel alsoe discusds steps to lower the tax cost of distributions and outline alternatives to revoking the S election.
Along with several provisions that adversely impact S corps, tax reform’s permanent reduction in C corp income tax rates is leading many S corps to evaluate their entity choice and explore whether converting to C corp status will provide more tax benefits. Tax advisers must have a solid grasp of whether, when, and how to make an S corp revocation election to avoid costly tax consequences. The law makes several changes to S corporation income treatment that negatively impact some companies and their shareholders.
Most notably, the 20 percent pass-through deduction under Section 199A does not apply to specific trades or businesses, and some S corporations may benefit from spinning off certain operations into C corporation status while retaining the S corp election for others. The law also contains provisions that in many cases will allow shareholders of “eligible terminated S corporations” to treat dividends paid during the “post-termination transition period” (PTTP) as coming from the corporation’s accumulated adjustment account or E&P more favorably than a typical dividend distribution from an operating C corporation. Such distributions are not subject to tax to the extent of the shareholder’s basis in the S corporation stock.
Final regulations provide rules for S corporation distributions made during the PTTP to qualify for 1371(f) treatment allowing taxpayers to treat a portion of these distributions as distributions from AAA for ETSCs (eligible terminated S corporations). John and Marcus provided thorough and practical guidance to help advisers determine whether, as well as when and how, to make a tax-efficient entity change from S corporation status to take advantage of the new tax reform law provisions.
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