AboutIvan Roth Expertise Federal and State Income taxes I do tax returns for partnerships and C corporations I am well versed with State Franchise taxes for CA, CT, FL,NY,TN,TX.
Experience Eight years as tax manger for a real estate company
Expert: Ivan Roth Date: 5/10/2008 Subject: buy out of partner in an S Corp
Question Hi,
I am co-owner in an S Corp with another individual. We each own 50%. We pay ourselves salary and have profit sharing each year. At the end of the year we take the S Corp balance down to zero to not show a profit from a company standpoint. Therefore, we are only personally each liable for our taxes.
We have agreed to a buyout price. Now we are discussing the payout terms from a tax standpoint.
He wants to do profit sharing and salary until we have reached the final payout. I don't really want to do that because it will take a fairly long time since we have to take out equal amounts in profit sharing, and I need to leave enough money in the company for general operations. Also, I would be paying his self employment taxes on his salary during the payout period.
So, I am proposing that he just invoice the current company from his new company for the new couple of months until we have reached the final payout amount.
Is this a good, fair way to do it from a tax standpoint?
thanks in advance!!!
Answer Hi First make sure that you do not purchase the whole 50% in a twelve month period as a change of 50% or more in one year terminates the c corp. (49.9 is ok)
Remember the earnings are distributed in an ownership basis so the billing idea is not proper.
However if the other person does no longer perform services but receives a portion of the profits because of ownership the profit would not be not subject to the self employment tax.
