In December the President signed legislation (the Protecting Americans from Tax Hikes Act of 2015) which made permanent a number of temporary tax provisions that previously had been the subject of serial one-year extensions. One of those provisions is of particular interest to S Corporations.
The look-back period for determining the applicability of S Corporation built-in-gains tax under Section 1374 of the Code was permanently set at five years. That period had been the subject of earlier temporary rules establishing ten-year, seven-year and then five-year standards.
An S Corporation that has been a validly electing S Corporation since its formation is not subject to Section 1374 and therefore is not affected by this legislation. However an S Corporation that was a C Corporation prior to its election to be governed by Subchapter S is subject to built-in-gains tax at the entity level on a sale of assets to the extent of unrealized appreciation in those assets measured at the date of the S Election. If the election was made five years or more prior to the asset sale, the built-in-gains tax does not apply. It is this five-year period that has been made permanent by the 2015 legislation.