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Dad owns a motel that is a c corp. He will sell next year…

Dad owns a motel...

Dad owns a motel that is a c corp. He will sell next year and will not reinvest in a similar business. After the sale and paying corporate tax can he delay tax liability on his personal side by holding the money in the business bank account until the following year or years later ?

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

Nothing else really. He wanted to keep his marketplace subsidy by not having an inflated income that would cause him to payback the tax subsidy

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Answered in 9 minutes by:
12/14/2017
Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,679
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Hi. My name's Lane ...

I hold a law degree (J.D.), with concentration in Tax Law, Estate law & Corporate law, an MBA in finance, a BBA, and CFP & CRPS (Chartered Retirement Plans Specialist) designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice to clients on three continents since 1986.

If you’ll please bear with me for a minute I’ll type up my initial response, and then we can go from there if you have further questions on this.

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The only way this can happen with ONLY the corporation having a taxable event is in the case where the corporation itself isn't sold .. but rather the Corporation sells it's assets but continues to exist.

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(Do an asset sale, rather than a stock sale)

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As long as the corporation doesn't distribute, there's no taxation to the individual.

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Please let me know what questions you have from here.

...

Lane

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Customer reply replied 7 months ago
I'm pretty sure it would be an assets sale. I'm not aware of stocks being involved. In fact I think they discussed doing a stock sale with buyer so tax liability would be lower. He is not selling the corporation. Just the motel itself.So the c corp can be inactive with no business transactions needing to take place ? Basically almost like a retirement account and pulling money out as needed and paying taxes on that amount ?Is there a time limit on how long he can do that for ?And if he is able to do this basically this sale would not contribute to his adjusted gross income ?He is getting monthly subsidies from marketplace insurance and is trying to keep a low income so he can qualify for the subsidy and not have to payback. This would be for the 2018 tax yearThanks

When a regular corp (C-Corp)is sold, it's either done as an asset sale, where the corporation sells some or all of its assets , or a stock sale, where the buyer is buying the corporation itself. Your father being the only shareholder.

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(He may not think of himself in that way, but he owns the stock of the C-Corp.0

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When the stock sale is done, the buyer steps into the shoes of the seller and the seller has a capital gain.

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But when the assets are sold, (asset sale), the corporation is SOMETIMES liquidated causing taxation to the individual of built in Gains .. you may have heard this referred to as the BIG tax.

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But when the corporation (still must pay annual fees to the secretary of, corporation must still pay income tax on any interest or dividends, rental income, dividends, etc., from the assets inside the corporation) stays in tact the only time that the shareholder (owner) is taxed is when money is distributed.

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ANd remind the buyer that he gets a step up in basis on the assets, even when fully depreciated. The purchase of the asset becomes the buyer's new basis. and as long as care is taken not to dissolve the C-Corp the gain on sale (which WILL eventually happen if the corporation is sold, so you COULD be setting up problems for a future generation ... the heirs will want to disclaim, any inheritance of the corporation ) is deferred into perpetuity... because corporations have perpetual lives.

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If this has helped, and you DON’T have other questions … I'd appreciate a positive rating, using the stars on your screen, and then clicking “submit" – That’s the only way I’ll be credited for the work.

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But again, if you need more on this, or if I've not understood your question correctly, please let me know.

Lane

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Customer reply replied 7 months ago
But when the corporation (still must pay annual fees to the secretary of, corporation must still pay income tax on any interest or dividends, rental income, dividends, etc., from the assets inside the corporation) stays in tact the only time that the shareholder (owner) is taxed is when money is distributed.From the above that you posted. Just want to make sure. He sells the assets. Keeps c corp intact regards ***** ***** annual corp fee.From what my dad says there will be no income dividends interest or rental coming in. No money going into the bank account. He plans on just letting sit there and taking distribution or wages only when he needs it to keep from reporting a higher income for the future.Is their a time limit he can do that ?He has no plans of leaving it as a part of an estate.So long story short he can basically treat c corp bank account as a retirement account by pulling money as needed and then paying taxesAgain he is doing this so he can receive subsidies from the marketplace insurance and avoid having to pay it all back at the end of the year because of a sale in the motel would significantly increase his income gross adjusted income.Thanks

There is no time limit ... as long as he follows the corporate law of the state, keeps assets completely non-commingled, and pays taxes on money taken out.

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The reason for this is that the C-Corp is a truly separate taxable entity and what corporate law (state law) calls a person, a fictitious person, or corporate person.

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Its also important that the corporation pays the tax on the assets sale ... that this structured completely as a sale between the buyer and the corporation.

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The only place where this won't fly is in the possibility that he is sued under what's called Alter Ego Theory ... That the corporation is, in effect, him.

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Commingling personal and corporate assets is the best way to allow that to happen, OR not to follow state corporate law.

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But as long as the company had a real business purpose and he's decided to forgo the benefits of that income until a later date .. and then pays the tax on that when he DOES receive the cash, the corporate veil should not be pierced.

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I wouldn't use the word choice "retirement plan." That's something completely different, a different body of law. This is simply his choosing not to dissolve the corporation.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Finance
Satisfied Customers: 14,679
Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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