“Should I convert this to S corp.?”------>I guess it basically depends on your specific personal business or taxation situation. However, formalizing the structure of your business may be able to bring significant business benefits in fields of liability and taxation and also image and credibility of your business as well. Before you choose a specific type of corporate structure, you need to understand the various types and their upsides and downsides .In general, the Subchapter C Corporation is the most common type of corporation and definitely one to consider when adopting a formal organizational structure. One of the downsides of a C Corporation is facing double taxation if the company issues dividends. On eof the chif advantages of regular C-corp, as many people acknowledge, is that as a formal corporation, C- corp. may be able to make it easier to raise capital and attract investors. Although S corporations can provide significant tax advantages over C corporations in the right circumstances, there are a number of potentially costly tax problems that you should assess before making a decision to convert your C corporation to an S corporation.
.” What happens to the profit of about of 50 K”------->I fyou convert your profits from C corp to S corp,In principle, as stated by the IRC # 1374, regular corporate tax rate, 35%,isusually imposed on line #19 of Sch D of 1120S on S-corp’s income or gain recognition to the extent of unrealized appreciation in a corporation on the date it switched from C to S status. The built-in gain tax is computed by applying the highest corporate tax rate, 35% as you know, to the net recognized built-in gain for any taxable year beginning in the recognition period; the period the 10 calendar years (not the 10 taxable years) beginning on the first day the corporation is an S corporation. Accordingly, you can avoid the BIG Tax if the unrecognized built in gain is not recognized until after the tenth year as an S corporation. Seriously, if your C-corp. is cash basis and carries A/R, then FMV of your A/R at the time of conversion ‘d be subject to high BIG ta x rate; As the A/R is paid after the effective date of the S election, the revenue from the payment of the A/R is treated as a recognized built-in gain. Then your S corp. pays BIG Tax at the highest corporate rate, as sad above, based upon the recognized built-in gain. However, the amount of the BIG Tax is a deduction for you, as a shareholder. It reduces each income item reported on your Schedule K. The common planning technique if a BIG should be necessarily recognized prior to the tenth year is to have the corporation create a net loss for the year. The rule is that BIG Tax is calculated on the lesser of the amount of the recognized BIG or the corporation’s taxable income if the S corporation was a C corporation. So assume that your taxable income is $0 due to NOL in 2011 ( after the conversion into S corp. from C corp.) , and also assume that your taxable recognized BIG amount is also $50,000; then, as BIG, $50,000>$0, taxable income in 2011. So, your taxable BIG is $0 in 2011. Another aspect that you need to remember is that if your s-corp. recognizes BIG but does not have taxable income until following the tenth year, then your S-corp. avoids the BIG Tax.