Business Matters

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Wow! Imagine paying zero taxes when selling your business.

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Yes, you are indeed reading the headline correctly. Just imagine, you started your C corporation business and just sold it for $5 million and you don’t owe any federal taxes at all on the sale! Thanks to good old (enacted originally in 1993) Internal Revenue Code §1202, along with some more recent tax law tweaks, the zero tax-bite is available for those businesses that are “qualified small business corporations” (QSBC).

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Of course, as with most things tax, there are a number of rules and details to follow and meet. You may even already have a tax code-defined QSBC. But, whether you are thinking of starting a business or if you already have a business and want to see if qualifying as a QSBC makes sense, paying zero taxes on the sale of your business stock is certainly a big incentive.

Then, additionally add to the benefit pile that the Tax Cuts and Jobs Act (TCJA) with its new 21% corporate tax rate, and it makes the small business corporation benefits potentially even more attractive.

The difference between a QSBC and a garden-variety C corporation is that if your corporation can qualify as a QSBC the stock sale is potentially eligible for:

  • a 100 percent federal income tax gain exclusion (think, tax-free capital gains), and

  • a federal-income-tax-free gain rollover break (again, think tax-free)

When QSBC status is available for a start-up business, it can potentially dictate against the conventional wisdom that operating as a pass-through entity (LLC, S corporation, etc.) is usually the right way to go. But, the only way to know is to perform the proper planning for business formation, finance structure, and taxes. This means getting together with your CPA in the planning phase of your business is critical.

What if you already have an existing business? Exploring restructuring far enough ahead of any potential sale of your business or time-frame when you think you may put your business on the market may allow you to take advantage of the QSBC benefits.

100% Gain Exclusion (Tax-Free Capital Gains)

To qualify for tax-free capital gains, you must:

  • acquire your QSBC stock after September 27, 2010

  • hold your QSBC stock for more than five years

And your tax-free capital gains from the sale of a particular QSBC. In any year can’t exceed the greater of

  • 10 times your aggregate adjusted basis in your QSBC stock you sell, or

  • $10 million reduced by the amount of eligible gains that you've already taken into account in prior tax years from sales of this QSBC stock ($5 million if you use married filing separate status)

The Devil is in the Details

Of course our lawmakers did not feel like including every business in this tax benefit. Qualified businesses do not include:

  • the performance of services in the fields of health, law, engineering, architecture accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of one or more of its employees;

  • banking, insurance, leasing, financing, investing, or similar activities;

  • farming (including raising or harvesting timber);

  • production or extraction of oil, natural gas, or other natural resources for which percentage depletion deductions are allowed; or

  • the operation of a hotel, motel, restaurant, or similar business

Also, the corporation’s gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued (which considers amounts received for the stock).

Selling Before 5 Years?

For you serial entrepreneurs that get that offer you just can’t refuse before the five year qualification period has run there is a tax-free gain rollover deal for QSBC shares held more than six months.

Once you have more than six months under your belt, you can sell your QSBC shares and roll over your eligible capital gains to a new QSBC even when you fail the five-year requirement. The rollover provision allows you to sell QSBC shares on a tax-deferred basis without losing eligibility for the gain exclusion break when you eventually sell the replacement stock.

Too Much At Stake Not to Plan

I’ve touched only on some of the rules and issues for this valuable tax planning opportunity. But I wanted to give you a good handle on how this idea might work to your benefit. If you would like to spend some time with me or my team going over the possibilities for you, please call us at 831-758-5966 or email us at info@schollcpa.com. Your success is our bottom line.

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I'd Like to Thank the Academy . . . .

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Sunday night, millions of movie fans across the globe tuned in as the Academy of Motion Picture Arts & Sciences presented the 86th Academy Awards. Viewers were amazed that Adruitha Lee and Robin Mathews spun a $250 budget into a Best Makeup award for Dallas Buyers Club. They held their breath and wondered how much Kim Novak had to drink before she stumbled her way through the animation awards. And they thrilled as first-timer Lupitsa Nyong'o won Best Supporting Actress for 12 Years a Slave. But there's one award we didn't see — and it's a key to getting any movie made. We're talking, of course, about the coveted award for Best Original Tax Planning.

When we think of movies, we immediately think of Hollywood. But most movies aren't

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Le Grand Tax Savings

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When you think of France, you probably think of food. The French are known throughout the world for their truffles, foie gras, and fine champagne. French chefs have spread the gospel of rich food and fine wine across the globe. Most of us think of "French" dining as the highest form of cuisine.

But it seems the French have a dirty little culinary secret they might not like the rest of the world to know. Would you believe they love McDonald's almost as much as we do? That's right, there are 1,258 golden arches across France, and France is actually McDonald's most profitable market outside the states. McDonald's outlets in France serve slightly more exotic fare than their American cousins — the "Premio au Parmesan" starts with the usual all-beef patty, then adds a ciabatta bun, parmigiano reggiano cheese, and creamy parmesan sauce. And French McDonald's serve beer, too. But — French gourmands can still sneak in anytime for "le Grand Big Mac."

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"Ardente!" is Portuguese for "Hot!"

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Tax collectors generally don't choose their line of work for the pay. Glassdoor.com, a gossipy website covering salaries and careers, reports the average Revenue Agent earns $73,967. Careerbliss.com tells us the average criminal investigator earns $99,000 — which makes sense considering there's at least a chance they get shot at while working. That's not bad coin . . . but it's hardly enough to party with the rich and famous.

But what's true here in the United States may not be true in the rest of the world. Our neighbors to the south in Brazil have been transfixed lately by a sordid scandal of glitz and bling featuring — you guessed it — a gang of tax collectors, accused of helping construction companies evade over $200 million in taxes.

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Touchdown, IRS?

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It's Week Nine of the 2013 football season, and millions of Americans are following every play. The Kansas City Chiefs are still undefeated. The New York Giants have finally won a couple of games. And playoff races are already starting to take shape. (Bengals, anyone?) So, what does any of this have to do with taxes?

Today's National Football League is the biggest spectacle since the Romans packed the Coliseum to watch the Christians take on the Lions. (Needless to say, the Lions were heavy favorites — and usually covered the spread.) Last year, the league generated $9.5 billion in revenue from a combination of TV rights, ticket sales, stadium concessions, and licensing agreements. The biggest part of that cash geyser goes to the players (who naturally pay tax on their salaries). More chunks go to the owners (who pay tax on theirs), and stadium vendors (who pay tax on all those eight-dollar beers).

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A Sweeter Tax Than Most

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When you hear the word "tax," you probably think of something the IRS takes out of your paycheck. Or you might think of something they take out of an inheritance. But taxes affect virtually every financial transaction you make. Take, for example, that simple jar of honey lurking on the shelf in your refrigerator.

Americans eat more honey than anyone else in the world — about 400 million pounds of it a year. Most of it goes towards sweetening foods like cereals, cookies, and breads. Even whiskey producers are adding honey to their blends to attract younger drinkers. (The Scotch Whiskey Association just stung Dewars for labeling their new "Highlander Honey" as "scotch" rather than "spirit drink.")