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Partnership considerations when converting to corporate status

Due to various law changes, many partnerships are reevaluating their legal status. Often the choice has been to convert to an S corporation. However, at least one commentator suggests that converting to a C corporation may prove to be a better option from the perspective of tax considerations.

Many have avoided the C corporation option out of concerns of double taxation in the event of distribution or liquidation. Yet as this commentator explains, a C corporation shares are provided the benefit of being "qualified small business stock" under Section 1202. As the law currently stands, if anyone invests in "qualified business stock" they can after five years sell the stock and exclude 100 percent of the gain from taxable income and the Alternative Minimum Tax.

This circumstance did not always exist. Prior to 2010, only 50 percent of gain from such stock was excluded under Section 1202. The remainder was subject to 28 percent taxation. Changes in 2010 allowed for 100 percent of the gain to be excluded if the stock had been held for five years.

There are a variety of rules concerning the issuance of Section 1202 stock that need to be followed. However, the 100 percent exclusion is set to expire at the end of this month. There are also certain options for partnerships to follow when making a corporate conversion under Revenue Ruling 84-111.

Anyone running a company and looking towards converting to another type of business due to tax ramifications should first speak to a qualified business and tax attorney. For partnerships set up in Kentucky, they may also wish to speak to an attorney licensed in our state to provide them with advice concerning state and local regulations as well.  Every option may bring along with it certain advantages and disadvantages that will need to be weighed.

Source: Forbes, "With Tax Break Set to Expire, Partnerships Should Consider Converting to C Corporations Before Year End," Tony Nitti, Dec. 18, 2013

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