In the previous post, we discussed the advantages of making an S election five years prior to a corporation selling its assets. A corporation that makes the S election typically avoids the two levels of tax (corporate level and shareholder level). However, a corporation that makes an S election and sells its assets within five years can be subject to a corporate-level tax called the “built-in gains tax.” Nevertheless, an S election may make sense even if the corporation makes such a sale.
Business owners frequently plan to fund their retirement with the proceeds from a sale of their business. However, they frequently fail to take the steps necessary to maximize the after-tax proceeds from the sale. One such step relates to closely-held corporations and involves making an “S election” for tax purposes.