You Make the Call - Oct. 5, 2023

Question: Brian and Cody are the only two shareholders of a C corporation. After operating the business for five years, they have decided to change the business to an S corporation by making a valid election on Form 2553, Election by a Small Business Corporation. They have a net operating loss (NOL) carryforward that was generated from the C corporation. Can the NOL carryforward be carried into the S corporation and continue to be used by the S corporation to reduce its income?

Answer: No. When the corporation makes the election to be treated as an S corporation, it will lose certain tax attributes accumulated by the C corporation, including the NOL carryforwards. This means that the S corporation cannot use any remaining NOL carryforwards it generated as a C corporation to offset S corporation income. However, it can use the NOL carryforward to reduce recognized built-in gains tax [IRC §1363(b); 1371(b); 1374(b)(2) and 1375(b)(1)(B)].