Tax Benefits of Converting a C Corporation with Undervalued Assets

Janet A. Meade, PhD, CPA

As a result of the recent economic downturn, many businesses have sustained significant declines in the value of their assets, particularly those holding real estate or certain intangible assets. The future of these businesses, while promising over the long term, may be dependent on attracting additional capital or financing. In cases where the business is taxed as a C corporation, it may be beneficial to convert the corporation to an entity taxed as a partnership. Such a conversion can provide significant tax benefits to current owners by triggering a tax loss with respect to their interests. Care must be taken as to the form of the conversion, because the tax consequences can differ significantly.