Liquidating distribution tax
(Recognized built-in losses, corporate net operating losses, and other items of deduction and loss generally could be used to shelter such carryover recognized built-in gain.) The Recognition Period Prior to the PATH Act, taxpayers have faced significant uncertainty for several years with respect to the duration of the recognition period.
The Tax Increase Prevention Act of 2014, enacted on Dec.19, 2014, extended the five-year reduced recognition period to tax years beginning in 2014.However, once again, because the law was enacted at the end of 2014, S corporations with built-in gains endured an uncertain planning environment for nearly all of 2014.By contrast, income earned by pass-through entities, including S corporations, partnerships and disregarded entities, is generally not subject to tax at the entity level.(Limited liability companies can choose to be taxed as C corporations or as pass-through entities.) Instead, a pass-through entity’s items of income and loss pass through to its owners.Some of these techniques received a significant boost from the Protecting Americans from Tax Hikes Act (the “PATH Act”), enacted on Dec. Overview of Entity Taxation Different types of entities are subject to different tax rules.
Income earned by C corporations is subject to two levels of tax, at the entity level (when the income is earned) and at the shareholder level (when the earnings are distributed to the shareholders).
The built-in gains tax is imposed at the highest corporate rate, currently 35 percent.
It generally applies to built-in gains in the hands of the C corporation that are recognized during the recognition period.
First, an S corporation cannot have more than 100 shareholders.
Second, an S corporation cannot have more than one class of stock, provided, however, that it can have stock with differing voting rights.
Whether an item of income or loss is capital in nature is determined at the corporate level.