Many small businesses may have been formed and operated as a C Corporation. Thereafter, for taxation reasons or other purposes the shareholders, officers and/or directors may deem it more appropriate for the business to operate as another entity such as an S Corporation. Under such circumstances, our small business attorneys are asked what tax carryovers of the C Corporation can be carried over to the S Corporation. For example, a client my ask us, “if we make the election to be taxed as an S Corporation, will our current net operating loss carry forward?” The article below has been drafted by a Denver small business attorney at The McGuire Law Firm to discuss a few issues regarding carryovers from a C Corporation.
In general, no carry forward or carry back that arises from a C Corporation taxable year can be carried over to a year for which the corporation is an S Corporation under Internal Revenue Code Section 1371(b)(1). Further, this issue was discussed in Rosenberg v. Comr., 95 T.C. 451 (1991) and it was held that the Tax Benefit Rule does not override and trump the plain code language of Internal Revenue Code Section 1371(b)(1). Examples of items applying to the law as stated under 1371(b)(1) would be:
– Net Operating Losses (See IRC 172(b))
– Charitable Contributions (See IRC 170(d)(2))
– Capital Losses (See IRC 1212(a))
– Foreign Tax Credit (See IRC 904(c))
Generally, it is believed and held that an exception exists to the rule above for certain carry forwards that could offset built in gains tax. Although, there is a general disallowance of carryovers from C Corporation years to S Corporation years, certain items may be able to be carried forward to the S Corporation years to reduce the built in gains tax. These items may include: capital losses, net operating losses and general business credit carry forwards. In regards to any restriction on time for the use of a carry forward, under Internal Revenue Code Section 1371(b)(3), a year in which the corporation is or was an S Corporation is treated as a taxable year for the purpose of determining the number of years for which the corporation level item, such as a capital loss, may be able to be carried back or forward.
A small business attorney at The McGuire Law Firm can assist you and your business in making business decisions based off of the legal and tax ramifications, drafting business contracts and documents and negotiating the sale or transfer of business assets or business interests. John McGuire holds an LL.M. in taxation. This knowledge in taxation is directly applicable to almost every decision or transaction a business executes or considers entering into. When was the last time you made a “major” business decision and did not wonder what the tax effect or implication would be? The McGuire Law Firm has law offices in West Denver and Denver, Colorado. Mr. McGuire works with businesses throughout the state of Colorado, and in other states depending upon the circumstances.
Contact The McGuire Law Firm to speak with a Denver small business attorney and schedule your free consultation!