Recent tax law changes favor S Corporation Shareholders and Venture Capital Investors
Recent tax law changes favor S Corporation Shareholders and Venture Capital Investors
The Protecting Americans From Tax Hikes Act (PATH) was signed into law in December. The PATH Act included two provisions aimed at benefitting corporate investors.
S Corporations
Historically, a C corporation that converted to S corporation status faced a corporate level tax upon the sale of appreciated assets within the 10-year period following the S corporation election. This was intended to prevent a sale of appreciated assets free of corporate tax occurring shortly after the C to S conversion. The 10-year period was reduced temporarily to 7-years and then 5-years during the recent recession. The 5-year period has been extended indefinitely.
C corporations that have contemplated an “S” election should reconsider the change with the benefits of the now permanent 5-year period. S corporation status could be particularly beneficial to corporations that anticipate selling assets in the near future and those that pay a regular dividend.
Corporate Investments
The federal tax code has for some time allowed an exclusion from tax of gains on the sale by non-corporate taxpayers of stock in a C corporation that has been held for more than 5-years. The amount excluded varies from 50%, 75% to 100% depending on when the stock was acquired. With passage of the PATH Act, the 100% exclusion now applies indefinitely.
To qualify for the exclusion, the corporation’s business must generally be an active operating company and not a designated ineligible activity (i.e., most service and financial businesses are excluded). The size of the business is also limited. An eligible corporation’s total assets generally may not exceed $50 million. In addition, the amount of gain excluded is limited to the greater of $10 million or ten times the tax basis in the stock owned.
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This Alert is provided to Clients and friends of the Firm. If you have questions regarding any of the items discussed, please contact Robert Smith at (501)370-1559 or [email protected].