C Corp electing S Status

[JAinNC]

I have a client (C corp since early '90s) past 2 years increasing profits. Construction business but also Corp owns a rental house and land (house not built by corp). Corp sold prior office and land in one part of state and has relocated to another part of state. Sale was in 2006 and is set up as an installment sale for 10 years. 2006 1120 was filed on time.

He likes to make his own decisions but he does ask my opinion. Corp had high tax liabilities in 2005-2006. If we elect S-status to take affect Jan 1 2008, is there a different handling of the installment sale after he is an Scorp. I have searched and cannot find that specifically.
The corp meets the requirements, the passive rental income and interest rec'd will not exceed 25% of gross income so no passive investment income tax should apply. Also no LIFO.
I haven't done a worksheet of assets yet. There will very probably be net unrealized built in gains.
I feel like I am missing something else. Any help before I advise him?????

As he gets older the 100% owner may slow down and have a lower profit. If he should have a loss in the future it would really help his personal return.

Jeannie

[Bees Knees]

The installment sale gain that has not yet been recognized is going to be subject to built-in gains tax as it is recognized over the next ten years. That means the portion that represents gain for each year will be taxed at the lower of 35% at the corporate level, or tax on taxable income computed as if the corporation were still a C corporation.

It could get very complicated. You could have the corporation distribute all of its E&P before converting to an S corporation. TTB on page 19-11 also gives an excellent example of how the corporation can accrue a bonus to the shareholder so that some of the built-in gain is limited or eliminated.

[JAinNC]

Thanks Bees Knees

I had looked at the BIG Tax and knew there would be one for some of the assets if sold within 10 years of effective date. BUT I wasn't thinking of the installment sale as an asset with a higher market value than the cost basis at date of election.

Yes, it will get complicated - this client's books were very screwed up when my office started the accounting about 5 years ago. We finally got everthing in his books running smoothly.

Is the installment note treated just like the AR for culculating BIG? Is accrued interest included here?
If the notes payable & AP are more than the notes receivable & AR then there would be no built-in-gain. Am I right?????