Discussion:Asset Sale of a C-Corporation
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Discussion Forum Index --> Tax Questions --> Asset Sale of a C-Corporation
| 15 January 2008 | |
| Hello all,
Quick question - I just want to make sure I am not missing the boat here. Here is the situation. C-Corporation with 2 shareholders sell their business via an asset sale (ouch!). They just told me that they purchased the stock of this business over 20 years ago for $60,000 a piece. Books show $100 each in common stock. Not sure what was done back then by prior accountant???? My clients want to deduct a loss of $60,000 on their Schedule D's because that was their cost of the Corporation which no longer exists because of the asset sale?? Any input would be great! Happy Tax Season! Kristi | |
| 15 January 2008 | |
| Is there a gain? Then the corp owes capital gain tax at high C corp rates. Then you have to get the money out of the corporation to the shareholders, and the distribution will be taxed at dividend rates. It will be ugly. The corp does get to deduct the gain or loss on the distribution. You need the inside and outside adjusted basis, any recapture, retained earnings amount, and a few other things to figure this correctly.
They are much wiser to convert to an S corp and wait the 10 years to avoid the Built-in-gains tax. Then the tax rate on the sale is much lower. If there is a loss on the sale of assets, it's much simpler. | |
| 15 January 2008 | |
| Not 100% positive about this but I believe the proceeds of the asset sale are liquidated to the shareholders in exchange for their stock if the company is ceasing to exist. So they will have gain to the extent those proceeds exceed the basis of their stock. | |
| 15 January 2008 | |
| Yes, there is a gain and yes we discussed having them convert to an S-Corporation and wait the 10 years, but that is out of the question for them. They would rather bite the bullet and get out. They do have gains and will distribute the money to the shareholders. The C-Corp will pay the tax and then the shareholders will pay the tax on the distribution of money to them from the sale at the dividend rates. But what about the $60,000 they paid personally for their shares. They did not sell their shares. The corporation sold their assets. Does the 60K they paid come in to play at all since it is an asset sale and not a stock sale? | |
| 15 January 2008 | |
| The corporation sold the assets and must recognize the gain and pay tax. Any remaining cash/property is distributed to the shareholders pro rata in exchange for their stock (liquidating distribution). Shareholders recognize gain to the extent distribution exceeds stock basis (60K). No dividends. See Sec. 331. | |
| 15 January 2008 | |
| Thank you for your help and for referring to me to the proper Section. It is very clear what has to be done.
Thanks again! | |
