Business assets easier to sell with tax change

Owners of S corporations don't have to wait as long to fully benefit from the sale of their businesses, based on recent changes in the federal tax code.

An S corporation, also known as a Subchapter S corporation, is a business with 100 shareholders or fewer that passes corporate income, losses, deductions and credit to the individual shareholders for tax purposes instead of the corporation as a whole.

In contrast, C corporations are taxed at the corporate level.

About 46,000 owners of S corporations file tax returns in Arkansas annually, said a spokesman with the corporate income tax section of the state's Department of Finance and Administration. They are among about 30 million business owners who include business profits on their personal income tax returns every year, according to Investopedia, the online business dictionary.

Previously, when a C corporation converted to an S corporation, the S corporation had to wait for up to 10 years after the conversion before it could sell the assets held at the time of conversion and avoid paying taxes on any gains.

Historically, the wait varied from five to 10 years, based on changes in the tax law, said Mark Steber, chief tax officer for Jackson Hewitt.

Now the time frame has been reduced permanently to five years, because of the enactment last month of the Protecting Americans from Tax Hikes Act. So a company that converted to an S corporation only has to wait five years to avoid paying built-in gains taxes on a sale of assets held at the time of the conversion.

If the act hadn't been passed, the time frame would have reverted back to 10 years, said Kevin Horn, a partner at Baird Kurtz & Dobson in Little Rock.

"This makes your planning easier," Horn said. "Because people can probably look ahead and see what might be happening in five years easier than they can for 10 years. And it probably has the effect of lowering taxes on a lot of family businesses that may be planning to sell."

Lowering the holding period for any asset, especially the capital assets of an S corporation, means the owners of an S corporation can sell at a better tax rate sooner, Steber said.

"You can benefit from the tax rules faster under this new rule," Steber said. "You can get to the lower tax implications faster under this shorter built-in gain time."

Family businesses, such as farms or banks, are often S corporations.

There are still farms in Arkansas that are being run as C corporations, Horn said. But many have elected to convert to S corporations and have sold their farms, Horn said.

Of the 106 banks in the state, 27 are S corporations, said Garland Binns, a Little Rock banking attorney.

The 2015 Protecting Americans from Tax Hikes Act made permanent certain tax-benefit provisions that expired at the end of 2014, according to San Francisco-based Andersen Tax, one of the largest independent tax firms in the country.

Another part of the 2015 act is the extension of a credit for spending on research and development, which has been in -- and out -- of the law since 1981, Andersen Tax said. It was made permanent last year, Horn said.

"If you do qualified research, you get a credit against your tax liability," Horn said.

The credit has increased to 20 percent, Andersen Tax said.

Steber suggests that the best decision a taxpayer can make is to file early. There are three benefits to that, Steber said.

"You get your money earlier," Steber said. "It's certainly safer. You have your taxes done and bad guys can't go steal your identification and file under your name. And third, if you owe taxes, you still don't have to pay until April 18."

About 75 percent of taxpayers get a refund each year, Steber said. The average tax refund each year is about $3,000, he said.

SundayMonday Business on 01/31/2016

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