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Beware of the Tax Bite on S Corp Conversion

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in Small Business Tax

Q. We switched from a C corporation to an S corp. Now, my accountant says we owe a passive tax. Can this be right? N.K., Brooklyn, N.Y.

A. Yes. A company switching to S-corp status owes tax on “excess net passive income,” triggered if the corporation’s passive income exceeds 25 percent of gross receipts and it has earnings and profits at year-end. Tip: The tax equals 35 percent of the lesser of the excess passive income or annual taxable income.

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