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A reader (Joe) of this column, who had a mammoth tax problem (both income tax and estate tax) called me. I listened. Both problems would be solved — easily — by electing S corporation status. Joe agreed.

His accountant, a fine CPA, was a bit hesitant, but sent a wonderful 15-item list of “pros” and “cons.” Following are all of the important items on the list, plus a few of my own. My additions and comments are showing in brackets.

First the cons

1. Probably would pay more income tax in current year. [Make the computation. But remember, when you want to get those after-tax dollars out of your C corporation someday, you will be double taxed. Also, see “pros 1.”]

2. Health insurance premiums for shareholders and their families are not fully deductible.

3. Long-term care premiums for related employees — including their spouses — not fully deductible.

4. Any assets owned as of the date of the S election are subject to the “Built in Gains Tax” if sold within 10 years after the election. [Never had a client hit with this tax. Must know what to do and when to do it.]

5. Use of a fiscal year is either not available or is impractical. Usually forces a December 31 year-end. [Rarely a consideration.]

6. The accumulated C corporation earnings would be permanently frozen at the date of election. [No problem, those earnings are frozen anyway.]

7. Life insurance proceeds cannot be distributed from S corporation until all S corporation and C corporation earnings have been paid out. [A corporation — C or S — should not own life insurance in the first place.]

Now, the pros

1. Earnings, after making the S election, are not subject to double taxation and do not increase accumulated C corporation earnings. [Over time this is reason enough for most C corporations to switch to S.]

2. Opens up new estate planning opportunities. [In this case will save Joe a total of $4 million in taxes: income tax, capital gains tax and estate tax.]

3. Reasonable compensation becomes a nonissue with the IRS.

4. [Unreasonable surplus problem (often a big and expensive deal) disappears.]

5. [An opportunity to divide family income with family members. Saves huge amounts of income tax and estate tax. Trick is to give nonvoting stock to kids and grandkids.]

6. Taxable dividends [automatic double taxation] no longer a painful consideration.

7. You enjoy capital gain tax rates instead of ordinary income tax rates on sales of assets acquired after the S election or after the 10-year built in gains period.

Hint. There are only three valid reasons when you should be a C corporation: (1) Your taxable profits are, and are likely to remain, under $125,000 and you need the after-tax dollars in the corporation to fund growth or pay down debt. (2) You use the C corporation as a vehicle to get the benefit of deducting your health insurance and/or long-term care premiums. (3) You have carry-forward losses or other tax credits that would be lost if you become an S corporation.

You say you are a C corporation and don’t have at least one of the above three reasons to stay that way. Then, it’s time for you to elect S corporation status. Do it!!

A final note: After Joe’s accountant reviewed my written comments, he called me with a hearty endorsement of making the S election.

Of course, every nuance and reason for becoming an S corporation is not covered here.

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Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein, LLP (CPAs) and Chairman Emeritus of the New Century Bank (both in Chicago). Contact Irv at 847-674-5295 or blackman@estatetaxsecrets.com. Web site www.taxsecretsofthewealthy.com.