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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28084
Experience:  Taxes, Immigration, Labor Relations
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I own a successful funeral business that is incorporated with

Customer Question

I own a successful funeral business that is incorporated with 200 shares issued. I would like to transfer ownership to current employees. I have valued business as follows
1-THREE YEAR ADVERAGE EBIDT=325,000.00 X 4.5=1,462,500.00
2-FH REAL ESTATE 1,500,000.00
3-CARRAGE HOUSE REAL ESTATE 500,000.00
4-TOTAL PURCHASE PRICE 3,500,000.00
I WILL FINANCE THE DEAL FOR 15 YEARS AT INTEREST RATE OF 0.50 FOR MONTHLY PAYMENT OF 20,186.77
I WILL TRANSFERE 50 SHARES EACH TO THREE EMPLOYEES AND RETAIN 50 SHARES MYSELF.
COULD THE IRS SAY A 0.50% INTEREST RATE IS THE EQUIVALENT OF A GIFT AND FORCE A CHANGE?
THANK YOU,
RONALD A. REMICK
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Yes - you will need to use a market interest rate - and buyers will need to pay that interest - and it will be reported as interest income of the recipient.You report interest on an installment sale as ordinary income in the same manner as any other interest income. If the installment sales contract does not provide for adequate stated interest, part of the stated principal may be recharacterized as "imputed" interest or as interest under the original issue discount rules, even if you have a loss. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale. The rates are published monthly in the Internal Revenue Bulletins on IRS.gov.See this:http://www.irs.gov/taxtopics/tc705.html
Expert:  Lev replied 1 year ago.
Another issue with the selling is related to how your business is organize - whether you sell shares of corporation OR that is asset sale.
That will affect how you report the sale transaction and if the gain woudl qualify as a long term capital gain or woudl be taxed as a regular income.
Regarding AFT rates - that will be also based on the loan terms.
This current short term rates are .48%
See here
http://www.irs.gov/pub/irs-drop/rr-15-16.pdf
In this case of a debt instrument with a term - is not over three years.
If you provide a loan between three and nine years - that would be middle term loan - and AFR is between 1.82% and 1.80% depending how interest is compounded.
For long term loans - more than nine years - AFR rates are between 2.82% and 2.78%
Let me know if you need any clarification this matter.
Expert:  Lev replied 1 year ago.
Another issue with the selling is related to how your business is organize - whether you sell shares of corporation OR that is asset sale. That will affect how you report the sale transaction and if the gain woudl qualify as a long term capital gain or woudl be taxed as a regular income. Regarding AFT rates - that will be also based on the loan terms. This current short term rates are .48%See herehttp://www.irs.gov/pub/irs-drop/rr-15-16.pdf In this case of a debt instrument with a term - is not over three years. If you provide a loan between three and nine years - that would be middle term loan - and AFR is between 1.82% and 1.80% depending how interest is compounded.For long term loans - more than nine years - AFR rates are between 2.82% and 2.78% Let me know if you need any clarification this matter.Let me know if you need any clarification this matter.