S Corporation Conversions
Internal Revenue Code Section 1374 (link to Section 1374) provides for the conversion of the Company from a C corporation to an S corporation. Section 1374 requires a determination of the fair market value of a company’s assets for comparison with the tax basis of such assets in order to determine whether there is a Net Unrealized Built-In Gain (NUBIG) as of the date a company elects to convert. For a period of 10 years following the date of the conversion, the company remains liable for payment of tax on the Company’s NUBIG for assets sold. After 10 years, the tax liability for NUBIG disappears.
What to Expect
As an alternative to individually valuing each asset on the Company’s balance sheet, an estimate of a firm’s aggregate NUBIG exposure can be represented as the sum of the fair market values of its equity and its liabilities less the tax basis of its assets. Accordingly, we utilize our normal methodologies to estimate the value of the Company’s equity and then add the value of its liabilities to arrive at an estimate of the fair market value of its assets.