I recently wrote on a strategy for old C corporations with appreciated properties. The idea is to make an S election and wait out the built-in gains period. Among the provisions of the Jobs Act which just passed the House and is now awaiting signature is a shortening of the period to five years. This is a lot less than 10, but it is still greater than 3. So a corporation that cannot rely on having active income will still want to purge its earnings and profits before the favorable rate on dividends goes away. The shortening of the recognition period makes this strategy much more viable.
I need to thank Jeff for pointing out that the shortening of recognition period is not a permanent provision. Someone electing in 2011 still faces a 10 year period. The period was shortened to seven years for sales in 2009 and 2010. We can't count on the shorter period sticking for someone who elects in 2011.
Does you think the shortening of the recognition period from 10 to 7 to 5 years indicates a future transition to a permanent 5 year period? I still favor a 2010 s-election (if not done already) and 2010 dividend in most circumstances. But I believe the act was only for years beginning in 2011 which makes the application of the change very limited. As written, it only helps some lucky taxpayer that must have had significant influence or 1/1/06 s-elections that will now defer transactions until 2011.
ReplyDeleteYou are right. I read the language too optimistically. It could be that they are just trying to get some revenue in 2011 by creating a window for sales.
ReplyDeleteI hadn't thought of it way but if it generates any activity it certainly is a win-win scenario for the government and taxpayer - accelerate the taxable event by 5 years through cutting the effective tax rate.
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