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Frequently Asked Questions
What happens if I convert a C-Corp back to an S-Corp?
The built-in gains tax of Section 1374 applies to gains that existed at conversion and are recognized within the following five-year period. This makes the C election harder to unwind than to make, which is why it should be modeled over a full holding period.
Does a C-Corp actually save tax?
Only on income retained in the corporation. The flat 21% corporate rate beats a 37% individual rate on retained earnings, but distributing those earnings as qualified dividends adds a second layer that pushes the combined federal rate to roughly 39.8%.
What is the accumulated earnings tax?
A 20% penalty tax under Section 531 on earnings accumulated beyond the reasonable needs of the business, with a credit of $250,000, or $150,000 for personal service corporations. It is defended with contemporaneous documentation of expansion plans and working capital requirements.
What is Section 1202 qualified small business stock?
A provision allowing exclusion of a substantial portion of gain on the sale of qualifying C corporation stock held for the required period. The OBBBA expanded the regime with tiered exclusions beginning at three years and higher caps, making it the primary exit for growth-oriented C corporations.
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