Figures: tax year 2026
Built-in gains (BIG) tax preserves a corporate tax layer on qualifying appreciation carried from C corporation years. A shareholder's pass-through tax remains a separate consequence of the asset disposition.
To calculate the projected amount subject to built-in gains tax, the corporation first separates preconversion appreciation from later appreciation. An asset register must establish conversion-date fair market value and adjusted tax basis for each relevant asset.
A corporation generally tests dispositions during the five-year recognition period beginning on its first S day. A taxable gain outside that period still passes through to shareholders under the ordinary S corporation rules.
A shareholder evaluating a proposed asset disposition must establish whether the S corporation received the property with carryover basis from a C corporation. Qualifying property can start a separate five-year recognition period on acquisition even when the recipient has always been an S corporation.
The asset-level calculation follows these rules:
- Recognized built-in gain is limited to actual recognized gain and the asset's remaining preconversion appreciation.
- Recognized built-in loss requires an actual deductible loss and evidence that the loss existed at conversion. Postconversion decline does not become a built-in loss.
Common mistakes
- Taxing all appreciation. In Example 1, applying 21% directly to the $300,000 sale gain produces $63,000 and skips the asset ceiling, annual limitations, carryforward deduction, and credit.
- Moving the termination date backward. July 1 is the first C day in Example 3. June 30 is the final S day.
- Using value for contribution basis. The staff's contribution basis in Example 4 should instead use transferred tax basis, producing $18,000.
Bottom line
- BIG tax requires asset-specific preconversion gain, recognized built-in losses, the remaining overall ceiling, the taxable-income limitation, and applicable carryovers before calculating corporate tax.
- The five-year recognition period concerns disposition timing; later installment collections do not independently escape the rules governing an inside-period sale.
- S termination begins on the effective revocation date, eligibility-failure date, or prescribed date following three consecutive passive-income failure years.
- Qualifying property contributions generally preserve transferred basis, while appreciated-property distributions recognize corporate gain before shareholder distribution treatment.
Exam shortcut
A sale analysis starts with three dates: conversion or carryover-basis acquisition, recognition-period expiration, and actual disposition. Installment collection dates are tracked separately. A termination analysis identifies the first C day before counting days, then checks consent, the size of any stock sale, and eligibility for closing the books. A property-distribution analysis calculates corporate gain, allocates it among shareholders, adjusts separate stock bases, and then classifies each recipient's distribution.
The full lesson (about 9,447 words, 63 min read) adds 13 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.C1
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