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Thinking about converting your C Corporation to an S Corporation? Before making the switch, do you know about the Built-In Gains (BIG) Tax—and how it could cost you thousands if you don’t plan ahead?

In this episode, Mike Jesowshek breaks down the Built-In Gains (BIG) Tax, a critical consideration for business owners converting from a C Corporation to an S Corporation. He explains why this tax exists, how it prevents businesses from avoiding double taxation, and the conditions under which it applies. Mike walks through key scenarios where the BIG Tax may or may not apply, how to calculate it, and the best strategies for minimizing or avoiding it.

[00:00 - 03:30] Understanding the Built-In Gains (BIG) Tax

• Mike introduces the BIG Tax and its purpose in preventing tax avoidance.
• What is the difference of taxation for C Corps versus S Corps?
• Owners need to be aware of BIG Tax before making an S Corp election.

[03:31 - 11:15] Calculating the BIG Tax & IRS Considerations

• Mike shares the three key conditions that trigger the BIG Tax.
• Fair market value vs. adjusted basis determines built-in gains.
• Mike discusses the step-by-step breakdown of how to calculate the BIG Tax.
• Proper asset valuation at the time of conversion is critical.

[11:16 - 14:00] Strategies to Avoid the BIG Tax

• Hold onto assets for at least five years to bypass taxation.
• Time asset sales in loss years to offset taxable gains.
• Utilize NOL (Net Operating Loss) carryovers from the C Corp.

[14:01 - 17:32] When the BIG Tax Does NOT Apply and Final Considerations

• Mike shares scenarios where business owners don’t have to worry about the BIG Tax.
• BIG Tax is not a reason to avoid an S Corp election—planning is key.
• What is the importance of documentation and fair market value assessments?

Notable Quotes:

“The BIG Tax exists to stop business owners from electing S Corp status right before a liquidation or sale to dodge double taxation.” - Mike Jesowshek, CPA

“Holding onto your assets for five years after converting to an S Corp is the simplest way to avoid the Built-In Gains Tax.” - Mike Jesowshek, CPA

“The BIG Tax is important to understand, but it’s not a reason to avoid an S Corp election. With the right planning, an S Corp is still a powerful tax-saving strategy.” - Mike Jesowshek, CPA

Check out this episode’s blog post: https://www.taxsavingspodcast.com/blog/beware-of-hidden-built-in-gain-big-taxes-when-transitioning-to-s-corporation

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Podcast Host: Mike Jesowshek, CPA - Founder and Host of Small Business Tax Savings Podcast

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