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I will be exiting a small business which i am 50% owner, it

Customer Question
is a C corp and...
I will be exiting a small business which i am 50% owner, it is a C corp and I will receive compansation for my 50% in payments spread over 10 years. Would this be considered capital gains and if so what would the rate be
Submitted: 8 years ago.Category: Tax
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Answered in 51 minutes by:
1/1/2010
Tax Professional: Lev, Tax Advisor replied 8 years ago
Lev
Lev, Tax Advisor
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Yes - as you are selling shares of C-corporation - you will have a capital gain = (selling price) - (basis).

Your basis is actually what you contributed into the corporation (or paid for shares - if you purchased them).

If you owned shares more than a year - that will be long term capital gain taxable at reduced rate - not more than 15% (for 2010).

 

An installment sale is a sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs. You are required to report the sale under the installment method unless you "elect out" on or before the due date for filing your tax return for the year of the sale. If you elect out, you report all the gain as income in the year of the sale. Installment sale rules do not apply to losses. You cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market.

Under the installment method, you include in income each year only part of the gain you receive, or are considered to have received (your gain is generally the amount by which the proceeds you receive or will receive from your sale, not counting interest, exceed your adjusted basis in the property you sold). Use Form 6252 , Installment Sale Income, to report installment income each year.

If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. You must report interest as ordinary income. Interest is generally not included in a down payment. However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Interest provided for in the agreement is called "stated" interest. If interest is not charged or the interest rate is too low, there is a minimum amount of interest you, as a seller, are considered to have received. This "imputed" or "unstated" interest or original issue discount is taxable. You must use the applicable federal rate (AFR) to figure the unstated interest on the sale.

Your tax prepare should be able to find out applicable AFR.

 

Because long term capital gain rate is set to increased to 20% from 2011 and consider interest income which is taxable at your regular tax rate - you may want to report total capital gain in 2010.

Please let me know if you need any help.

 

Lev
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Customer reply replied 8 years ago
can i use long term capital looses to off set part of the capital gains on this transaction and can I save some for 2011 and beyond?
Tax Professional: Lev, Tax Advisor replied 8 years ago

You must report capital gains and capital losses - both long and short term in the year they are realized.

You may not decide to "save some" for next year.

Capital losses are used to offset capital gains - and net capital gain should be included into your taxable income.

Let me know if you need help with reporting.

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