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Category: Tax
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Experience:  32 years tax experience, including four years at a Big 4 firm.
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if i have a c-corporation that has a net operating loss carried

Customer Question

if i have a c-corporation that has a net operating loss carried forwarded over 5 years but has been making a little bit of money due to sale of company assets (including ongoing business and equipment) since 2010 through may 2013...

how do i sell the company (i am a 100% shareholder) to another company to user the NOL to have favorable tax consquence on their part? and then how do i handle the loans with the company from 2 individuals? the loans equal the value of the loss.

let's just assume it is a 750,000 Loss and loan #1 is 500K and the loan #2 is 250K.

thanks for your help on understanding value and sale of business.
Submitted: 2 years ago.
Category: Tax
Expert:  DanielleCPA replied 2 years ago.
Welcome and thanks for your question!

First, in order for a C Corp NOL to carry over after a sale of the business, the sale needs to be structured as a stock sale rather than an asset sale. Stock sales are less attractive to potential buyers because an asset sale helps shield them from liability related to any debts, lawsuits, etc that occurred before they purchased the business.

Let's assume the sale was structured as a stock sale. While the buyer would be allowed to deduct some of the loss, under IRS Code Section 382, the loss is limited. When there is a more than a 50% change in ownership in a "loss corporation" (generally, a corp with an NOL carryforward), the loss is limited to the value of the corporation at the time of sale times the "tax-exempt rate." The tax exempt rate refers to the long-term applicable federal rate (interest rate published by IRS). The applicable federal rate is currently about 2.6%.

For example, let's say the value of the company is $150,000. $150,000 times 2.6% is $3900. That means in any given year, the buyer could only deduct $3,900 in your NOLs to offset their income. That's not that much of an incentive.

In regards to the value of the company, you need some meaningful method of determining the value. Here is a really good article about the different methods available. The most common method I see is some type of multiplier, e.g. 2 times net income. What multiplier or valuation method is most appropriate is dependent on the type of business and risk your buyer is assuming.

If you need any clarification, please let me know and I will gladly assist you. If this satisfactorily answers your question, please give the answer a positive rating. Thanks and have a great evening!
Expert:  DanielleCPA replied 2 years ago.
Hi Adam,

I noticed you rated my answer "poor service." Did you have any other questions or did you need clarification on something?

Please let me know, as we here at Just Answer seek to make sure you are fully satisfied with our answers.

Thanks!
Customer: replied 2 years ago.

You didn't answer my questions:


how do i sell the company (i am a 100% shareholder) to another company to use the NOL to have favorable tax consquence on their part? and then how do i handle the loans with the company from 2 individuals? the loans equal the value of the loss. ?


 


Maybe the questions aren't clear.. how do i sell the company such that the buying company can get 100% use of the net operating loss) and then how do i handle the 2 loans to the company that equal the value of the loss?


 


This may be better suited to a tax attorney who deals with the IRS and not a CPA

Expert:  PDtax replied 2 years ago.
Welcome to the site. The first Expert is correct about there being limitations on NOL use when purchased.

382 limitations were installed in response to companies buying loss corporations to use their NOL's. The limitations under 382 allow for a portion of the NOL to be used each year. There is no way for an purchaser to use all the loss immediately.

The second issue is what to do to establish bad debt treatment for the losses due from the loans. Business bad debts get complete writeoff treatment, but must meet specific requirements.

http://www.irs.gov/taxtopics/tc453.html is the IRS publication that outlines the requirements for business bad debt (ordinary loss treatment) versus nonbusiness bad debt treatment (capital loss, limited to capital gains plus $3,000 per year).

Thanks for asking at Just Answer. Please advise if you need anything more.

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