It is not uncommon for companies to be formed as C corporations and later decide to convert to an S corporation status to avoid the double taxation that comes with being a C corporation. On the date of conversion to an S corporation, the IRS requires the company to be re-valued in order to determine potential built in gains (BIG) tax that may be applied if the company were to sell or have any change in control event during the next 10 years.
Special considerations for C to S corporation conversion valuations:
C to S corporation conversion valuations are conducted using the Fair Market Value premise of value as specified under Revenue Ruling 59-60. Though not required, it is highly recommended that the company also conduct a purchase price allocation valuation at the same time it obtains a C to S corporation conversion valuation. Since built in gains tax is applied on an asset by asset basis, it can be very difficult to determine the value of the individual tangible and intangible assets within the company if it is sold 5 to 9 years later. By conducting a purchase price allocation at the same time, it will facilitate a smoother process and potentially be tax advantageous in the event of a sale or change of control within the following 10 years.
