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I have an S corporation since ten years and have been doing some IT consulting work. I am planning to sell the assets (employees, contracts) along with working capital for 2M to a public company. I have a zero cost basis. Would this 2M be a long term capital gains or ordinary income?
Whether the company is an S or C corporation, when the company liquidates, its
shareholders recognize a capital gain on the difference between the liquidating distribution and their respective stock bases. You may negotiate as to the allocation of the purchase price among the various assets. You as the seller would want to allocate a larger amount of the purchase price to capital assets, such as real estate improvements and equipment, so that a larger amount of the purchase price will be taxed at lower capital gains tax rates.
In general, structuring the transaction as a stock sale favors the seller. Typically, the purchase price is adjusted to reflect the tax affects.
The buyer is a public company and does not want to do a stock acquisition since the due diigence and reps/warranties would be more complex. They prefer asset sale along with NCA and help me with tax planning. I will continue to keep the shell (the current company) for some time. Would this change the taxation situation?
Also, we are trying to close this before 12/31/12 for taking advantage of 15% capital gain vs 23.8% next year and do I have to pay 300K capital gain taxes (15% on 2M purchase price) now or next April?
Following the sale, the shareholders of the S corp (you and any others if there are other s) cause its liquidation and receive a cash liquidating distribution.
The buyer may want to allocate a larger amount of the purchase price to ordinary income assets such as inventory and accounts receivable, the cost of which could be expensed or realized on in a relatively short period of time. You would do good to have your own tax adviser in on the negotiations to make sure that your interests are looked to as well.
You would want a larger amount of the purchase price to capital assets, such as real
estate improvements and equipment, so that a larger amount of the purchase price will be taxed at lower capital gains tax rates. All income aof course will pass to you but the better capital gains rates would assist you (this is all under the current tax laws as we know them and if the sale is after 2012 you would need to keep abreast of any changes). As long as the sale happens prior to Dec 31, 2012 you would still have till April to remit tax payment.
does this mean that my wife and I must dissolve the corporation/liquidate for the tax treatment? Our company has many valuable minority and govt certifications and would like to keep the shell for future use after 1 year of non-compete.