Discussion:Planning a stock sale of an S-corp
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Discussion Forum Index --> Tax Questions --> Planning a stock sale of an S-corp
| 22 June 2007 | |
| I've searched and cannot quite find my answer to this scenario so please bear with me on this as it is similar to several others:
I am planning a stock sale purchase of the family business and I'm starting to plan for my cash flow needs and tax liability. The first question that I'm trying to tackle is what my tax liability looks like in an S-corp. Please help me with the following example: Business Income = 125,000 Owner Salary = 36,000 Principal Pd on Land Contract Note = 24,000 Interest Pd on Land Contract Note = 36,000 What would my tax liability be in this scenario? I know that the interest paid on the note is deductible, but I'm not sure how the principal is treated and any distributions with leftover earnings. Am I correct in assuming that the federal and state income tax liability is based on $89,000 (business income - deduction on interest paid)? If I have leftover earnings after the payments on the land contract, how will those be taxed (how does a stock basis dictate the tax on a cash distribution?) Thanks for any help you can offer in this scenario. Sincerely, Rick | |
| June 22, 2007 | |
| Well, your facts aren't clear. You're buying the stock of the S? Where does the 'land contract' come in, or is that just what you're calling the note to buy the company? Or are you really buying the assets of the company? That affects your taxes in a big way. But to help you start, your fed taxable income will be both the profit and the W2 income. Only the W2 has SS tax attacched tho'. The interest should be deductible either way, but probably not the principal assuming that this is a stock purchase. | |
| 22 June 2007 | |
| JR,
Thanks for your response. Yes, the scenario I am examining is a stock sale of the S-corp and I am referring to the note to purchase it. I do understand that the W-2 has full SS tax liability, but I am trying to determine the federal tax liability. Due to the structure of the note, I am concerned that so much of the business income will go into paying off the note that the tax liability will be comparitively high to my actual wages and possible cash distributions. I am also examining a lease contract with a buyout option in an attempt to reduce tax liability, but I'm unclear on the IRS rules governings this type of transaction. Rick | |
| June 22, 2007 | |
| OK, I had it then. Fed tax is on the profit and your salary together. All tax is one the 1040, excepting whatever state you're in that may welll tax corp profit. The interest is deductible, but not the principal. As to leases, if it's equipment that you're referring to, generally it depends on the buyout at the end that determines tax treatment. If a nominal buyout, then we treat it as a purchase, depreciation, interest, etc. If not, then it's just lease expense. On an option, only rent until you exercise the option, and then it's a purchase for tax purposes. You should have an accountant helping you on all this... | |
| 22 June 2007 | |
| It is still unclear where that land contract is being held, and for what, and from what. Is he taking the l/c out of the S corp before selling? | |
| 22 June 2007 | |
| Thanks again JR. I am meeting with an accountant in a few weeks, but wanted to get a heads up on some of these things. There are a lot of things to consider when structuring this sale, and since I am purchasing from my family it is an opportunity for a touch more creativity. I'll be doing a lot of reading here and asking questions too. What a great place to learn, help, and share!!!! | |
| 22 June 2007 | |
| Kevin,
Here are the details of the note: My parents would be selling 100% of their shares of the company to me - making me the sole owner, a majority of which will be financed by a note either from them personally or possibly from another lending source in addition to my personal contribution. I hope that clarifies things. | |
| 22 June 2007 | |
| Your question seems to concern cash flows ie: Am I going to take anything home from this transaction?
That requires a reliable set of financial statements and some analysis. Working capital, the current ratio, historical comparisons, your personal tax bracket and the effect of this additional income, etc. Have you seen financials and tax returns for this company? | |
| 22 June 2007 | |
| Beth,
Yes, I have seen the financials and the info is reliable and attractive long term. I know the historical data and it is reliable. You are right to say I am concerned with cash flow. The company will make money on paper, but for the first few year or maybe 2 until the inventory is paid cash flow will be tight(unusual business - the inventory is substantial and only about 50% is available on credit terms). I have some working capital to cover for this, but the missing part of my equation is how much will I need and that's why I'm asking the questions about tax liability. The current tax returns and financials don't have any long term liabilities so that will be the main difference between now and after I purchase. | |
| 22 June 2007 | |
| what real estate is being sold on a land contract? Who owns it now? Who will make the payments? | |
| 22 June 2007 | |
| Kevin,
The properties and buildings are being sold on a note, and they are presently owned by my parents. I will make the payments on them after the stock purchase. Rick | |
| June 22, 2007 | |
| Ah, you will get to depreciate the buildings then, which is less than the note principal sadly. | |
