LLC to S-Corporation Conversion Clarified

The IRS has issued a new ruling that applies to a Limited Liability Company (LLC) electing to be taxed as an S-corporation. The ruling clarifies that there does not need to be a short tax year as a C-corporation in the middle of the process of converting from a “partnership” (the default tax status of an LLC) to an S-corporation. Avoidance of the accounting and tax burdens of an intervening C-corporation tax year is welcome to all involved.

S-Corporation Built-In Gains Period Now 7 Years

The new stimulus law, the American Recovery and Reinvestment Act of 2009, signed into law by President Obama on Feb. 17, temporarily reduced the S-Corporation built-in gains period from 10 to 7 years. For tax years 2009 and 2010, S-corporations can avoid C-corporation maximum-rate income tax on built-in gains. Built-in gains are generally gains that were unrealized at time of conversion from C-corporation to S-corporation. Generally these gains are subject to the maximum C-corporation tax rate if realized (the property is sold) by the S-corporation within 10 years of S-election.

Late S-Corporation Election Allowed

IRS has again issued a Private Letter Ruling allowing a retroactive late S-corporation election when a corporation and its shareholders have reported income as if an S-Corporation election has been timely made, where reasonable cause was shown for failure to timely make the election. PLR 200904018.

S-Corporation Election Not Terminated by Convertible Debt

IRS privately ruled that an S-corporation that inadvertently created a second class of stock by issuing notes convertible into stock was allowed to continue as S-corporation as long as corrective adjustment were made.

S-Corporation Continues Despite Trustee’s Mistake

IRS privately ruled that an S-corporation election was not terminated in spite of trustee’s inadvertent failure to make ESBT (Electing Small Business Trust) election.

S-Corporation Continues Despite Beneficiary’s Failure

IRS ruled privately that an S-corporation could continue even though a trust beneficiary did not make the QSST (Qualified Subchapter S Trust) on time. When the case is effectively presented by a CPA, the IRS continues to allow S-corporations to continue despite technicalities that should cause termination of the S-elections.