S corp built-in-gain period temporarily shortened

For C corporations holding appreciated property, there is a double tax on its sale.  First the corporation pays tax on the sale of its appreciated property equal to the difference between the sale price and the property’s basis, multiplied by the corporate tax rate.  Then, when the corporation distributes the proceeds to its shareholders as a dividend, the individuals pay a second level of tax on dividends received.  To avoid this second level of tax, the C corporation could (if eligible) file an election under Subchapter S and wait ten years and sell the property and only one level of tax on the gain would be paid.

In order to attempt to spur the economy, Congress has temporarily shortened the ten year built-in-gain holding period.  Beginning in 2011, the “Small Business Jobs Act of 2010,” the tax title of H.R. 5297, the Small Business Lending Funding Act ( P.L. 111-240 ) provided that for S corporation tax years beginning in 2011, no tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded the 2011 tax year.  Code Sec. 1374(d)(7)(B)(ii).  Thus, if a corporation converts now to an S corporation, the built in gain property cannot be sold for 10 years, but if a conversion was done in 2005 or earlier, the built-in-gains tax on S corporations will not apply to the sale and thus the second level of tax can be avoided.  For companies who filed S elections in 2005 and earlier, they are now free to sell their appreciated property and only be subject to a single level of tax.