Finance 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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Names!

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Every year, the IRS gives us a peek inside the wallets of the highest-earning 400 Americans. It's full of juicy facts like their average income ($318 million in 2014), how much they give to charity ($37 million each) and how much they pay Uncle Sam ($73.5 million). But there's one set of facts the IRS guards as carefully as the secret formulas they use to decide who gets audited — the top taxpayers' names.

That wasn't always the case. Back in 1924, the stock market was soaring, flappers were dancing the Charleston, and

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It's Freezing Where?

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Taxpayers across much of the Midwest and east coast have enjoyed a relatively light winter this year, with mild temperatures and little snow. But Old Man Winter made up for it last week. Temperatures dropped well below zero and wind chills broke records across the country. Friday morning saw thermometers dip below freezing in the Florida Everglades, and parts of North Carolina were colder than in Barrow, Alaska!

Care to guess where else temperatures have been falling? If you said "in Hell," you're right. That's because the House of Representatives, where gridlock appears to have found a permanent home, actually passed a bipartisan tax bill last week. The America Gives More Act would take three of those maddeningly "temporary" tax breaks that Congress barely manages to extend every year, and make them permanent. As the name implies, all three are intended to reward charitable giving:

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Largest IRS Phone Scam Spreading

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It is tax preparation season and the scammers our there know that taxes are weighing heavy on the minds of many taxpayers. The scammers are relying on the fact that you are thinking about taxes and the IRS right now.

Yesterday the Treasury Inspector General for Tax Administration (TIGTA) is warning all taxpayers to beware of phone calls from individuals who claim to represent the Internal Revenue Service, but in reality are trying to defraud you, in what it is saying is the largest ever scam it has seen to-date.

“This is the largest scam of its kind that we have ever seen,” said TIGTA Inspector General J. Russell George in a statement. He commented that TIGTA has thus far received reports of over 20,000 contacts and is aware of thousands of victims who have collectively paid over $1 million (and climbing) as a result of the scam.

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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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The Naughty List

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Christmas is almost here, and that means millions of parents across America are telling their kids to behave themselves or risk winding up on the "Naughty List." (Admit it — if you've got kids, and you celebrate Christmas, you've done it yourself.) But while kids may be on their best behavior, grownups sometimes fail to make the connection between their own behavior and what Santa leaves under the tree. This is especially true when it comes to taxes! Misbehave there, and you risk a lot more than a lump of coal. So here are four cautionary tales to consider as the holiday approaches.

  • Joel Grasman worked as an electrician for the Metropolitan Transit Authority in Long Island. He and his wife owed the IRS $10,000 in tax for failing to report a loan from her pension. So, late one night, Grasman snuck into the yard where he works to steal some welding machines to pay off that debt. He loaded the machines onto his truck just fine, but forgot to lower the long boom on the truck before driving off to store the machines at his brother's garage. Uh oh. “I wanted to get out of there before I attracted any attention and I forgot to put the boom down,