Under IRC Section 1374, a corporation making an S corporation election must obtain a valuation to determine the built-in gain – the appreciation in asset value from the period of time when the entity was a C corporation – as of the date of the S corporation election.
If the S corporation subsequently sells any of these assets within the 10-year time period1 after its conversion from a C corporation (the recognition period), a built-in gain may be realized and the company will be liable to pay the highest corporate level tax rate on the gain as if it were a C corporation. Further, built-in gains attributable to intangible assets and goodwill may be subjected to tax, unless an S corporation can establish that such intangible assets are separable from goodwill and were acquired post S corporation election.
