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What Happens When Switching from C Corp to S Corp:
- S corporations aren’t subject to corporate tax. However, those converted from C corporations are taxed on built-in gains recognized within five years after the conversion. Consult a professional before converting to avoid unforeseen consequences.
Converting from C Corp to S Corp Tax Consequences:
- Other factors to consider in switching from a C corp to an S corp status. Shareholder-employees of S corporations can’t get the full range of tax-free fringe benefits available with a C corporation.
Steps and Considerations for Converting C Corp to S Corp:
- Retained C Corp earnings aren’t transferred when converting to an S Corp. The retained earnings are considered distributed to shareholders as dividends before conversion, which shareholders pay taxes on. Net operating losses can’t be carried forward from a C corp to an S corp. To convert, corporations must get written shareholder consent and file IRS Form 2553. While C Corps offer more tax options, S Corps allow pass-through taxation, saving small businesses taxes.
Tax Consequences and Strategies for C to S Corporation Conversion:
- Converted S corps can owe tax on passive income exceeding 25% of gross revenue. Other C corp benefits, like tax-free fringe benefits, may be lost when converting. Strategies can minimize conversion problems. Consider circumstances carefully before switching C corps to S corps.
