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An S Corporation & its 2 shareholders are selling the assets…

An S Corporation & its...
An S Corporation & its 2 shareholders are selling the assets of the Corporation. The Corporation provides corporate credit card processing services and its primary assets are the contracts with its customers & its goodwill, as well as the goodwill its shareholders have built over the years. Is this transaction subject to capital gains tax rates, as well as the 3.8% Net Investment Income Tax. please note both shareholders materially participate in the business.
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Answered in 5 minutes by:
1/15/2018
Carter McBride
Carter McBride, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 533
Experience: Adjunct Professor
Verified

Hey! I'm Carter, I'm a CPA and I can help you with this.

Yes, the gain on the sale will be subject to capital gains tax. If they have been depreciated, then part of the gain will be ordinary under IRC 1245.

Since they materially participate in the S Corp, then the capital gain portion will not be subject to Net Investment Income Tax.

Hope that helps. If you need anything else, just let me know. If not, please leave a rating. Thanks!

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Customer reply replied 1 month ago
I was reading that under section 1411(c)(4) the sale of S Corp stock may be subject to the 3.8% tax. Is this sale not subject to it since it involves the sale by the S Corp & its shareholders of the assets?

It is not subject to NIIT because they materially participate. Since the materially participate it means it is not just an investment. They will have to pay NIIT if the S Corp owns any investment assets. That calculation can get very complicated.

Tax Adviser has a great article on it here:

https://www.thetaxadviser.com/issues/2014/apr/clinic-story-10.html

Carter McBride
Carter McBride, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 533
Experience: Adjunct Professor
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