S Corp Election (IRC1374) Valuation

As per IRC Section 1374, a corporation making an S-corp election needs a valuation to determine the built-in gains - the appreciation in asset value from the period of time when the entity was a regular C-Corp - as of the date of S-Corp election. This prevents C-Corp entities from saving taxes by converting into S-Corps just before the sale of business or appreciated assets.

If such a converted firm sells or otherwise disposes of a business asset whose value includes part of the built-in gains determined at such S election date within ten years from the S status election date, it will be liable to pay tax on such gains at the highest corporate income tax rates.

Further, built-in gains attributable to intangible assets and goodwill may be subjected to tax, unless an S Corp can establish that such intangible assets are separable from goodwill and were acquired post S-Corp election. In addition, corporations must bear in mind that the burden of establishing separability and value determination lies on them. Given the severe potential tax liabilities, corporations often opt for an independent appraiser to not only determine the business entity’s value as a whole but also identify and value all tangible as well as intangible assets separately as on the S-Corp election date.

Aranca provides comprehensive valuation support to clients opting for S-Corp election. With our extensive experience in business and intangibles valuation, our highly qualified team of ASA and CFA professionals, and our unique ability to integrate the insights from business research and intellectual property research into our valuation analysis, Aranca’s thorough and clearly documented appraisal reports provide clients with defensible valuation opinion in case of a potential IRS challenge at a later date.

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S Corp Election Valuation
“We have had a few valuations done by Aranca. ... Absolutely no problems with the reports, we have a very complicated cap structure and have filed an S-1, and the SEC has reviewed and blessed the results and the supporting report. These were done expertly and at a very competitive price."
- Partner, Legal Counsel Firm