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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3754
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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My hisbands company was incorrectly set up as a c corp in

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My hisband's company was incorrectly set up as a c corp in 1973. We now want to sell our building property which is owned by the corporation. He is the sole shareholder. How can we minimize the capital tax we are going to have to pay?
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

NPVAdvisor :

Hi, has the C-corp been paying taxes since 1973?

NPVAdvisor :

As a C-corp the company would have been filing taxes itself (where an S-corp files, but the actual tax liability flows through to the owner)

NPVAdvisor :

If , a C-Corp, here's the form that would have been used: 1120, U.S. Corporation Income Tax Return (PDF)

NPVAdvisor :

In an S-Corp, THIS FORM would have been the form filed ... but the profits would have been distributed via a form K-1 and carried to the personal 1040 return: www.irs.gov/pub/irs-pdf/f1120s.pdf‎

NPVAdvisor :

If you can let me know a little more of the details, I can best answer your question, and help you figure this out. I COULD very well be that (with the new 15% cap on capital gains to a higher income than before) if this was an S-Corp you may have as little as a 15% tax, or even zero, if your income was below a certain level

NPVAdvisor :

Let me knos ...

NPVAdvisor :

(know)

NPVAdvisor :

Lane

Expert:  Lane replied 1 year ago.
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Customer: replied 1 year ago.


We have been filing taxes as a c corp since 1973 and separate taxes personally.

Customer: replied 1 year ago.


we have been filing 1120 for the corporation

Expert:  Lane replied 1 year ago.


Hi Arlyne,

Ok, as you probably know, C-Corps don't have a separate capital gains tax rate ... it's all considered income at corporate rates,.... which range from 15% to 35%.

However, considering the economy, the recent decline in real estate values and the detrimental tax rate for real estate sales inside a C corporation, now could be the time to act to limit the gain inside the C corporation.

(I'm guessing this is what you're thinking)

Basically, there are two primary ways to get the real estate out of a C corporation and still maintain control of the real estate:

1. Distribute the real estate out as a dividend, or

2. Sell the real estate to a related entity or individuals



Here's a thought:

If the corporation is eligible to make an S corporation election, the gain at the time of the election is tracked as net unrealized built in gain (typically called NUBIG).

THen if the S-Corp sells the asset within 10 years, the corporation pays a C corporation tax on this NUBIG. After the 10 year period passes, the asset can be sold and the shareholders will be entitled to the long term capital gains rate on gains in excess of the depreciation recapture.

By the way, this holding period was shortened for dispositions that happened 2009 through 2011, and (with the way our tax law is constantly changing) it's possible it'll be shortened again by Congress.

Now, if the sale is required before the end of the statutory holding period, only the NUBIG is subject to corporate tax, ...

... and the depressed real estate values we see today enhance the benefits of an S corporation election now.



Short of that (please don't shoot the messenger here) ... the primary things are (1) to add any improvements that were made to the basis of the property, (2) Selling at a discount for some other less quantifiable value to try and mitigate the amount of gain.




One last point ... I you do look at doing the S-Corp election, and you are looking for another property, you may want to consider a 1031 exchange as part of that strategy.

Here's a good piece on that "tandem strategy." (The piece talks about -as it was written in 2010_ the 5 years holding period, but everything else still applies)

www.1031-connection.com/siteAssets/.../IRS_Ruling_Has_C_Corp.pdf‎


Hope this helps

Lane

Positive feedback or an accept is appreciated. That's the only way JustAnswer will pay us for our time.
Customer: replied 1 year ago.
If part of the sales is cash up front, and the rest is a mortgage held by us over 15 years with interest, how is that taxed.
?
Expert:  Lane replied 1 year ago.


Hi Arlyne,

The gain is figured based on sales price less adjusted basis.

How the sale is financed is irrelevant.

INDIVIDUALs can elect an installment sale where the portion of the gains that's financed can be deferred and recognized as the loan is paid .... let me check and see if that election is available for C-Corps..

Give me a little bit to be looking up the regs on that...

In the mean time you might want to look at this:

(I have no association with these folks, but what they do MIGHT apply)

http://www.archdevrealty.com/C_Corp_.html




Lane
Expert:  Lane replied 1 year ago.


Yes, C-Corp can elect installment method (ON amount financed)


In this type of transaction, the buyer of a business agrees to pay the seller a certain amount of money over a fixed period of time. Under this approach, the IRS has ruled that only the amount of distribution in any given year is subject to any applicable taxes in proportion to the total due.

See this from IRS:

C-Corporations: Capital gains from an installment sale are carried forward from Form 6252 and reported on Form 1120, Schedule D. Short-term capital gains are reported in Part I. Long-term capital gains are reported in Part II. The net short- and long-term capital gains and losses are carried forward to Form 1120.

Here's an excellent overview, with the qualifications that may apply and some best practices for doing it this way too (note: escrow of payments)

From: http://www.smallbiztaxadvisor.com/federal/top10.lasso

“If a buyer is allowed to pay the purchase price over some extended time period, such as five years, the seller may be able to defer the overall gain on the transaction until payments are actually received by the seller (along with applicable interest). However, no deferral is allowed with respect to any portion of the transaction that represents depreciation recapture (described in Section 4 above) or gain on ordinary income type items such as accounts receivable or inventory.

A seller who provides seller financing is of course at risk for the buyer not operating the business successfully and the possible non-payment of the installment note. In addition, if the deferred portion of the sale price exceeds $5 million, the IRS has established rules that require the seller to make interest payments that essentially negate the benefit of the installment sale tax deferral. Sellers who make an installment sale are permitted to “elect out” of the installment sale method and pay all the tax related to the transaction up front. This may be desirable in some situations, especially if the seller believes capital gain rates will increase significantly in the years when payments are to be made.

Buyers may also establish escrow amounts where a portion of the purchase price is put into escrow and paid to the seller at a later date after it is clear that the seller’s representations and warranties in the transaction agreements were not violated. Such escrows can be structured to provide the seller with installment sale treatment so that the seller does not pay tax on the escrowed amount until the escrow “breaks” and the proceeds of the escrow are paid to the seller.”





Hope this helps,



Lane

Customer: replied 1 year ago.

If we can convert to an S corporation prior to the sale, would the installment payments be taxed under the c corp, or the s corp.

Expert:  Lane replied 1 year ago.
C-corp, because of the 10 year period mentioned above
Expert:  Lane replied 1 year ago.
Hang on Arlyne,

It looks like the fiscal cliff deal may have, indeed shortened, the recognition period back to 5 years.


Give me a minute


Lane
Expert:  Lane replied 1 year ago.

 

 

 

 

 

 

Yes, Arlyne, it WAS changed back (made permanent), as with some of the other provisions)

 

 

 

 

S corporations can be subject to the built-in gains tax of section 1374 if they used to be C corporations or if they acquired assets from C corporations in a carry over transaction such as a Co-Corp conversion to S-Corp.

 

The tax, however, only applies to the extent the S corporation has “net recognized built-in gain” in a tax year beginning in the “recognition period.”

 

The American Taxpayer Relief Act of 2012 (the “New Law”) includes a provision that shortens the tax recognition period to five years for purposes of determining net recognized built-in gain during tax years , beginning in 2012 and 2013.

 

 

 

 

 

 

Here are the code citations:

 

See sections 1374(d)(8) and 1.1374-1(d) and -8 for rules relevant to carryover basis transactions, including the determination of the recognition period for assets acquired in such transactions. Except to the extent specified otherwise, all section references are to the Internal Revenue Code of 1986, as amended, or the Treasury regulations promulgated thereunder.

 

See section 1374(a). Net recognized built-in gain is the base for the tax. An S corporation’s net recognized built-in gain generally is determined by reference to the corporation can be limited by the corporation’s net unrealized built-in gain (“NUBIG”) limitation or its “taxable income limitation” for the year.

 

Very generally, an S corporation’s RBIG and RBIL reflect recognized built-in gains and losses (and some income and deduction items) that are viewed as attributable to a C corporation period. See sections 1374(d) and 1.1374 -4 for the technical definitions of these terms.

 

 

 

 

Here's the full article:

 

https://www.kpmg.com/US/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Documents/wnit-fiscalcliff-feb42013.pdf

 

 

 

Lane

 

 

Customer: replied 1 year ago.
Does that mean that the first 5 years of the sale we would be taxed at the c corp rate then the last 10 years of the note we would be taxed at the s corp rate?
Expert:  Lane replied 1 year ago.


You have it.

OR if you elected S-Corp now and deferred sale for 5 years it could ALL be S-Corp.

But no COMPLETE immediate gratification
Customer: replied 1 year ago.
Is this the same for state (New York) as well? Sorry I did not ask this all at once.
Expert:  Lane replied 1 year ago.

Thats, OK

A C Corporation, as we;ve been discussing, becomes an S Corporation only when special tax treatment is sought by filing Form 2553 with the IRS.

http://www.irs.gov/pub/irs-pdf/f2553.pdf

New York State also requires you file a form to be treated as an S Corporation under State Rules. This form CT-6 Election by a Federal S Corporation to be Treated as a New York S Corporation.

http://www.tax.ny.gov/pdf/2007/fillin/corp/ct6_707_fill_in.pdf

So you would need to file the 2553, then once accepted, file for recognition by NY.

At this point I don't find where NY has the same tax at all ... in other words, I can't document that they would treat your company and it's income as anything other than an S-Corp, once you have elected that your federal S corp (once election is accepted by IRS) be treated as a NY S-Corp by filing the CT-6.



I WILL let you know if I see anything.

Lane

I would appreciate either an “accept” or a feedback rating of 3 (OK) or better. That's the only way they will pay us here...
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 3754
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 6 other Tax Specialists are ready to help you
Customer: replied 1 year ago.


Thank you for all your help. It has been a great help where others have not been able to give me information that I could even understand. If you get anything else that you think might be of additional assistance, you can email me direct if you want toXXX@XXXXXX.XXX


 

Expert:  Lane replied 1 year ago.


Thanks so much Arlyne.

This site won't let us communicate directly,but I WILL post anything else I can find here:

Lane

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