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What is a built-in gain for an S corporation?

In the event that a previously recognized C corporation elects to convert and be treated as an S corporation, they could be subject to “built-in taxable gains” that will be taxable at the entity level. The built-in gains will be imposed on the appreciation that occurred on all assets that were held during the time that the company was considered a C corporation. They are “built-in” at the time of the conversion. This entity-level tax will be applied when the S corporation disposes of that property at a gain within five years subsequent to the S election.

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