Discussion:C Corp R/E distribution
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Discussion Forum Index --> Tax Questions --> C Corp R/E distribution
| 1 November 2006 | |
| C Corp with $275K retained earnings wants to distribute out land and buildings (fully depreciated)FMV $240,000 to sole stockholder. Stockholder wants to avoid tax. The distribution would be taxable as a dividend which is not a good solution. Looks like his only alternative is for the Corp to sell the land and buildings and manage its income to the lowest tax bracket feasible. Does anyone have any creative defensible ideas to distribute the asset and avoid or reduce tax? | |
| 1 November 2006 | |
| C corp will recognize the same gain on distribution as it would on sale. | |
| 1 November 2006 | |
| LOL JR1, that option doesn't really work either since we have tax in the Corp before any distribution. | |
| November 1, 2006 | |
| But the corp. stock basis steps up if there's mostly just RE in the corp...so you avoid the personal level tax. | |
Corptaxhelp (talk|edits) said: | November 15, 2006 |
| Is the real estate the only meaningful component to
the C-Corp? If so, I might have some ideas. | |
| November 15, 2006 | |
| Wow! A picture! OK, so you won't be anonymous, CorpTaxhelp...so give us some background here. What kind of things can you do generally? We don't want to pick your pocket or anything...but give us some broadstrokes so that we've got some comfort level that you know what you're up to.
Thanks. | |
| November 15, 2006 | |
| Did everyone see the pics that Sandy put on her user page? Beautiful! Now I want to go to Maine! | |
| 15 November 2006 | |
| "Second verse, same as the verse." Have you considered having this fellow do an S election?
The issue that is not clearly stated in the responses above is that the stockholder is facing two levels of taxation if your present course of action is followed. First, the R/E gets distributed to the owner at FMV. You indicated the building is fully depreciated, so, likely the basis of the land is fairly low and thus you will be facing a large gain inside the C corp. Thus the corp will pay tax on the gain from the distribution of the property to the s/h. Secondly, the s/h will face a tax on the dividend. What does the client intend to do with the R/E after getting it out of the corp? If he intends to hang onto it, keep it in the corp, get an appraisal and do an S election. Hold it for 10 years before selling it. If he intends to sell the property this will not work. | |
| 15 November 2006 | |
| HEHE thank you Tim...I want to go back to Maine!!! I spent a few weeks in Nassau and a few in Maine, and I vote for Maine....I wish more of you guys here would share some pics on your pages...would be nice to see who we are dealing with...hehe. Tim...GO as they say in Maine "Life the way it should be" | |
Corptaxhelp (talk|edits) said: | November 15, 2006 |
| I'm going to assume the corporation is just the real estate.
1. The corporation sells its assets (in this case, the real estate). 2. The corp is cash, lesser assets and a tax liability. 3. The shares of the corp are sold to a third-party at a tax-affected rate plus a reasonable premium. Step three is where I think there is value to be added. Let's say there is a $10m of cash in the company and a $2.5m basis. So, that's $7.5m of taxable gain. State and federal taxes are going to weigh in at 40% or so -- $3m in taxes. At the end of the day, the shareholders would walk away with $7m. I know of investors that would be very interested in buying the corporation at this point. If they were interested in the transaction, they would pay in the neighborhood of $8m for the corporation's shares. The net result is that the shareholder would end up with an extra million dollars in his pocket. Now, $8m isn't $10m but it is certainly better than $7m. It sounds like a lot of extra work but it really isn't. Once the shareholders see the numbers and understand this isn't pocket change -- there is in fact a meaningful amount of additional monies -- they almost always go this route. Converting to an s-corp is another option but you have the ten-year delay. A lot can happen in ten years. I'd much rather have the money in my pocket sooner rather than later. I'm sorry for coming in a little weak on details at first. I'll do better next time. | |
| 16 November 2006 | |
| One mil for a three mil liability is on the thin side, but as previously mentioned the brokers are out there. Fewer takers for the little guys. | |
Corptaxhelp (talk|edits) said: | November 16, 2006 |
| Dennis, anything can be negotiated, of course. You might be able to get more. Still, to the kind of folks I generally work with, a million dollars is a meaningful amount. Heck, to me a million dollars of found money is more than enough to make me wet my pants.
The premium depends on how clean the corporation is at the time of the sale. Buying the company's shares transfers a great deal of liability in addition to the tax. If there was sloppy accounting or outstanding legal questions, the premium has to take that into account. If the company the model of proper accounting and business practices, it could be more. That's why I hate to give out any figures without speaking to the shareholders and/or their advisors. This is not a cookie-cutter deal and it must work for both sides of the transaction. You're right about the deal size. There are fixed legal and accounting costs to make the transaction happen. As the tax liability shrinks, those costs are a larger portion of the equation. It used to be a $250k liability had plenty of takers. Now it seems like $1.25m is where folks start to bite. | |
| 16 November 2006 | |
| The competition is the lease option over ten years. Shareholders get a guaranteed return on their money while they are waiting for it. Buyer gets a larger writeoff leasing than depreciating so the vig drops. | |
