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Discussion:Capital Gain
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Discussion Forum Index --> Tax Questions --> Capital Gain
Jigisha (talk|edits) said:
| 7 June 2006
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| I am confused between sale of business Vs sale of stock.I know that if it's a gain from sale of stock then you can offset against the capital loss .Not sure if you can offset the gain from sale of business against the capital loss from stock.
I have a client who has capital loss carryover & wants to sale his business.It's a c corporation & he is the only shareholder.I would like to know whether to sale the stock entirely then business or it doesn't matter.
Please advice.
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JR1 (talk|edits) said:
| 7 June 2006
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| It matters. You may need to find someone with experience in handling these transactions. Basically, to the seller, he wants to sell the stock. Simple transaction, reported on Sch. D, all cap. gain. Yes, it would cover any CL carryovers. However, the buyer usually wants to buy assets, not the stock. Why? Amortization and depreciation. If the buyer buys the stock, he's merely invested in the corp, and has no write off until he sells it. Which sucks for the buyer. If he buys assets, he writes them off as usual. Now, back to the seller...in a C Corp (crowd, please take note of just one more nail in the coffin of bad ideas in C corps!!!! Natalie!!!!), the company is actually selling all its stuff. So it'll recap depreciation and pay cap gains on excess amounts at the corp. level. Then, whatever money is rolled out to the shareholder gets that lovely second layer of tax. Very very bad. So usually, in the end, the price is negotiated to meet in the middle, where the tax advantage to the seller is reduced, and the tax disadvantage to the buyer is reduced...and a stock sale is done.
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Warren (talk|edits) said:
| 7 June 2006
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| Under IRC Section 338 the buyer can create a corporation and have that corporation buy the stock of the target corporation and treat it as an asset purchase which would increase the basis of the assets to the purchase price amount. The buyer would end up with a new corporation owning the assets of the old corporation with the new higher basis and without any unknown liabilities that might be hanging over the old corporation.
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JR1 (talk|edits) said:
| 7 June 2006
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| Interesting. But still no write-off's, right, Warren? Or are you suggesting that they can be written off?
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Warren (talk|edits) said:
| 7 June 2006
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| Also there are ways to minimize the double taxation issues that are a problem with an asset sale. I have a client right now in the process of selling. My client has no non-compete agreement with his own corporation. The buyer that is buying the assets of the corporation want a non-compete agreement as part of the deal. So, to make the deal happen, my client's corporation will have to pay my client some monetary amount so that he will not compete with the buying entity. In most cases, there will be some double taxation problem even after this but it could be minimal in many cases. I definitely prefer S Corporations over C Corporations but there are usually some things that can be done to reduce the tax somewhat.
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Warren (talk|edits) said:
| 7 June 2006
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| Yes, the assets can be depreciated using IRC 338.
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JR1 (talk|edits) said:
| 7 June 2006
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| Fascinating. Why have I never heard of this? (Rhetorical question...)
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Jigisha (talk|edits) said:
| 8 June 2006
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| Thanks
I have one more question.If a sole shareholder of a C corp(private co)sales his 100% stock ownership then who will run the business.I mean for buyer if it's just an investment property then who will report the revenue & losses.(In my case it's a gas station)
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Warren (talk|edits) said:
| 8 June 2006
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| Who is buying the stock? Shareholders elect the corporation's board of directors and the board of directors hires corporate management and corporate management hires other employees. So whoever owns the stock decides who runs the business. If the buyer is an individual then he would decide who runs the business and he would report revenue & expenses on his personal tax return.
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Cpasd (talk|edits) said:
| 8 June 2006
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| My understanding is that even under 338 there will be gain recognized at the Corp level, either by the target Corp or if elected by the new Corp.
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JR1 (talk|edits) said:
| 8 June 2006
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| Exactly! I was just reading this...Cpasd, are you in my head?? Warren, it clearly says that this is a deemed sale and gain is recognized at the corp. level of the target corp (the one being bought and collapsed). So that does not help. Now, this is beneficial maybe, well, is it..in an S transfer, IF there are no BIG taxes...but if it's a deemed sale, are gains and deprec. recap then picked up by the new shareholder? That doesn't make sense either. Warren, you started this. Talk.
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Warren (talk|edits) said:
| 8 June 2006
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| You're correct that there are still gains recognized at the Corp level and there is probably no way to totally avoid that with a C Corp sale. One way to reduce the corporate level tax as I mentioned earlier is a payment to the shareholder(s) for non-compete agreement. I have a one shareholder C Corp that is selling for about $800,000 in an asset sale. The corp has about $250,000 inventory and about $40,000 tax basis in fixed assets. Sounds like about $500,000 gain at corp level. But part of the deal is a non-compete agreement. The C Corp can pay the shareholder for the non-compete agreement and in the case I was talking about the amount will probably be over $300,000 to the shareholder which is essentially a cost of sale to the C Corp reducing the gain by $300K.
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Warren (talk|edits) said:
| 8 June 2006
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| My point in mentioning IRC Section 338 to begin with was not that you could avoid tax at the corporate level because for that purpose it isn't any different than an asset sale. My point was that the new corporation could get a step up in basis of the assets to the purchase price even when they purchase the stock.
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JR1 (talk|edits) said:
| 8 June 2006
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| Very creative work, with the non-compete agreement to offset some of the C corp gain. Tucked away for future use.
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