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Tax implications of a C Corporation converting to an S Corporation There are basically two tax options for a corporation.
A regular corporation (or C corporation) pays tax on its earnings at the corporate level.
S corporation shareholders are taxed on income whether or not the earnings are distributed.
This rule applies whether or not the S corporation has E&P from C corporation tax years.
Let’s consider the following example: ABC, an S corporation, has approximately 0,000 of C corporation accumulated earnings from years preceding its election to be taxed as an S corporation.
These earnings are referred to as C corporation earnings and profits, or E&P for short.
Rather, the S corporation income flows through to the shareholders, and they pay the tax personally at the individual level, on the shareholders individual income tax return.
So if you are a C Corporation, what happens when you convert to an S corporation?
The remaining $20,000 is treated as first a tax-free return of the shareholder’s initial stock investment of $10,000, and the remaining $10,000 represents payment for the sale of the shareholder’s stock, normally treated as capital gain.