Certain S Corp Finanical Institutions Could Get Relief from Big Tax By: Joseph M. Press, CPA Date: 9/10/09 Any financial institution that has elected to be taxed as an S-Corp (or is seriously considering the election) is aware of the built-in gains tax, commonly referred to as the BIG tax.  In what can only be described as an odd tax relief provision, the American Recovery and Reinvestment Act of 2009 (ARRA) provides that for tax years beginning in 2009 or 2010, no tax will be imposed on an S-Corp's net recognized built-in gain if the seventh tax year in the ten-year recognition period preceded the tax year.  To understand this temporary change, a refresher on the BIG tax will be helpful. Built-in Gains Tax Basics Instituted in 1986 to prevent C-Corps from avoiding corporate level taxes by making an S election immediately prior to a sale of its assets. BIG tax is imposed at the highest corporate rate - currently 35%. BIG tax is imposed on gains realized during the ten-year post C-Corp recognition period on the disposition of any asset that was in existence during its time as a C-Corp (only the amount of built-in gain that existed at the date of S election is subject to the BIG tax).  Such gains could even be the result of assets not appearing on the balance sheet, e.g. goodwill. Before the enactment of ARRA, the recognition period was a ten-year period starting with the 1st day of the 1st taxable year the corporation was an S-corporation. A new recognition period applies for built-in gain property that is acquired from a C-Corp in a carryover basis transaction. Impact of ARRA The following table illustrates the impact of the new legislation: Effective Date of S Election    Recovery Period Suspended After   10 Year Recovery Period Returns January 1,                                December 31, 2000                                          2008                                                      N/A 2001                                          2008                                                      N/A 2002                                          2008                                                      January 1, 2011 thru December 31, 2011 2003                                          2009                                                      January 1, 2011 thru December 31, 2012 It is important to note that the legislation has no impact on S-Corps where the election was made before 2000 or after 2003.  Conclusion S-Corps that made elections from 2000 to 2002 which realize a net built-in gain in 2009 or 2010 will not be subject to the BIG tax.  S-Corps with a 2003 election would be exempt from the BIG tax for net built-in gains realized in 2010 only.  The relief from the BIG tax is narrowly constructed and temporary.  Therefore, any S-Corp that believes it is eligible for relief and is contemplating a transaction that will recognize a net built-in gain should consult with their tax advisor.