The "Big Tax" for S corporation conversions

If your C corporation is thinking about electing S corp status, make sure you plan ahead or you may wind up owing a substantial tax on unrealized profits for the 10 years following the conversion.

The built-in gains (BIG) tax, which can be quite onerous, equals the highest corporate tax rate (currently 35 percent). If your firm is liable, the tax is paid at the corporate level and the gain is taxable again at the shareholder level.

The net built-in gain subject to tax during a year is limited to your firm’s taxable income for the year. You carry forward any excess to the next year.

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