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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
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what is the tax when I sell 100% of my s-corp stock

Resolved Question:

what is the tax when I sell 100% of my s-corp stock for 5% of gross sales over 20 years?
Submitted: 2 years ago.
Category: Tax
Expert:  BK-CPA replied 2 years ago.

Hello and thank you for your question.

.

The starting point is to determine the fair value of the stock. If you were to sell this to a third party for cash up front, what would the price be? That is the sale price of the stock and a note payable from your son to you should be drawn up in the year of the sale. Gain or loss should be calculated accordingly, noting if you take back a note and have a gain you can use the installment method. If using the installment method, interest should also be calculated each year.

.

That said, I realize you want to do 5% of sales. That is fine, but the difference between what you receive (or do not receive) and the payments you should receive based on the note payable is going to be a gift.

.

Example:

Given:

1) The fair value of the stock is $100,000 so you sell the stock to your son for that amount as you do not intend to gift it initially.

2) Your basis in the stock is $50,000, meaning that for each $1 you receive $0.50 is gain.

3) You take a note from your son to pay for the stock at 5% interest.

4) Per your agreement, you have your son pay you 5% of sales with a maximum loan period of twenty years (ie... state in your loan that after 20 years any unpaid principal balance is immediately due and payable).

5) In year one you receive $5,000.

6) In year two you receive $10,000.

7) In years three through twenty you receive $85,000 in principal payments plus interest.

8) Your son does not pay anything other than the 5% of sales for twenty years.

.

Then:

1) In year one the entire $5,000 payment is interest revenue given the 5% interest rate and after year one the principal balance of the note remains $100,000.

2) In year two you receive $10,000, half of which is principal bringing the note balance down to $95,000 and half of which is again interest revenue to you. At this point, you would recognize gain of $2,500 having received $5,000 principal payments using the installment method.

3) After twenty years the balance of the note is $10,000 (this is the $95,000 balance after year two less the $85,000 in principal payments received during years three through twenty). If your son is not going to pay you the final $10,000 that is due and payable, it is a gift from you to him.

.

.

I hope this is helpful. Thanks again for your question.

BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 818
Experience: Owner of a CPA firm
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