Built-In Gains (BIG) Tax

The built-in gains tax is a corporate-level tax that applies when a C corporation converts to an S corporation and then sells appreciated assets it held at conversion. Without it, a C corporation could elect S status right before a sale and skip the double tax on its accumulated appreciation. The tax applies at the top corporate rate (currently 21%) to the "net unrealized built-in gain," the appreciation existing on the conversion date, but only on assets sold during the five-year recognition period after conversion. Survive five years and later sales face only the single shareholder-level tax. Planning around BIG includes obtaining a conversion-date appraisal to fix the built-in gain, timing asset sales past the five-year mark, and using recognized built-in losses and NOL carryovers from C years to offset it. Cash basis receivables and inventory count, so service firms converting with large receivables need to model the hit.