7781 / How is an S corporation taxed?
Editor’s Note: See Q to Q for a discussion of the substantial changes to S corporation taxation made by the 2017 tax reform legislation.
An S corporation is generally not subject to tax at the corporate level.1 However, a tax is imposed at the corporate level under certain circumstances described below. When an S corporation disposes of property within 10 years after the S election has been made, gain attributable to pre-election appreciation of the property (built in gain) is taxed at the corporate level to the extent such gain does not exceed the amount of taxable income imposed on the corporation as if it were not an S corporation.2 (ARRA 2009 provided that, in the case of a taxable year beginning in 2009 or 2010, no tax was to be imposed on built in gain if the seventh taxable year of the ten-year recognition period preceded such taxable year. The Creating Small Business Jobs Act of 2010 provided that, for a taxable year beginning in 2011, no built in gain tax was to be imposed if the fifth year of the recognition period preceded that year. The American Taxpayer Relief Act of 2012 extended that rule for taxable years beginning in 2012 and 2013 and the Protecting Americans Against Tax Hikes Act of 2015 (PATH) made the rule permanent.)
For S elections made after December 17, 1987, a corporation switching from a C corporation to an S corporation may also be required to recapture certain amounts at the corporate level in connection with goods previously inventoried under a LIFO method.3