If you are thinking about converting your C-corporation into an S-corporation, you must plan ahead to avoid owing a substantial tax on gains recognized for 10 years following the conversion.

The built-in gains (BIG) tax rate is the highest corporate tax rate, currently at 39.6 percent. If your company is liable, the tax is paid at the corporate level and again at the shareholder level. It is limited to your firm’s taxable income for the year, and any excess is carried forward to the next year.

There are some things you can do to reduce the BIG tax, such as selling loss assets to offset built-in gains, or using loss and credit carryovers from the C-corporation. Consult with Filler & Associates about analyzing your company’s balance sheet and figuring out what steps you can take to reduce the tax. It may also be possible to reduce the company’s taxable income to zero for the year built-in gains are recognized.

Despite the BIG tax and other costs involved in an S-corporation conversion, it may still be a tax-wise move. Some S-corporation owners have some more flexibility, with the usual 10-year recognition period being reduced to 7 years in some cases, and 5 years in others. But if the BIG tax is especially severe in the case of your company, you might decide to remain a C-corporation, as least for the time being. It is critical to meet with Filler & Associates and engage in both short and long-term planning to keep your tax bill low.