AboutRichard Fritzler Expertise Specializing in Business and Corporate taxation. Comparing the advantages and requirements of different business entities, such as Sub-S Corporations, LLC`s, Partnerships (Both Limited and General), Doing Business as a Sole Proprietor, or Using a C-Corporation. Issues regarding K-1 distributions, 1040, schedule C, 1120, 1120s. Are you considering domiciling a Corporation in a low tax state? I can review the benefits and misinformation that exists.
Experience I have been in the business of assisting business owners in reducing their taxes and liability since 1986. The company is Owelesstax, incorporated, at www.owelesstax.com
Organizations National Small Business Owners Association. Publications Contributing author to "The Corporate Standard Newsletter".
Publications Contributing author to "The Corporate Standard Newsletter".
Question QUESTION: Hello Richard,
I am selling a partial interest in an S-Corp to some of the other shareholders of the S-Corp. The CPA that the entity uses(not my CPA and one I don't particularly trust) calculated a cost basis of my interest which I believe is incorrect. I don't think it is off by much, maybe 35-40K (I calculated a cost basis of approximately $650K and the entity's CPA came up with $614K. As I understand it an S-Corp is not required to report cost basis to the IRS, but is it tracked by the IRS some other way? If I can back up my numbers do you think I am safe to use the basis I calculated? Also, I am under the impression that I can add the cost of this transaction (legal fees, appraisals, etc) to my cost basis. Is this correct? Is there any other way to reduce the tax liability in this situation? And how much time do I have to pay the capital gains tax on this sale to the various taxing authorities? Thanks in advance for your expertise in this matter.
ANSWER: Could you tell me:
Are you selling 100% of your interest, which is a fraction of the S-corp stock? or;
Are you sellng a fraction of your ownership interest to a third party?
If so do you hold a majority or minority percetnage of ownership?
What you have is a whole lot of potential issues. If this is a sale of a minority interest to a third party, they would have reason to determine a cost basis. they have not right or reason to know what your basis is.
If this a partial sale then basis can be attributed to the remaining stock.
QUESTION: Thank you for your response. I am selling 100% percent of my interest and it is a minority interest. I own approximately 10% of the entity. I acquired that 10% at three different points in time and at three different values per share. I understand the buyers will need to know their cost basis when they purchase, but isn't that just what they pay me for my interest? I was just concerned about my cost basis and how it relates to my capital gains tax.
Answer Absolutely correct. Their Cost Basis is what it costs them. To them it matters not, taxwise, what your basis is or your gain, or your net profit.
It might be of interest for the buyers to know your finances so they could divine an offer that was good enough but not too good.
You are the one that will determine what tax you pay, as a result of your net gains, and any recaptured depreciation. You should be confident that you are right, otherwise the IRS may find you didn't pay enough and will assess you the back taxes plus penalties and interest.
I believe you have a solid understanding of gains, but don't forget Depreciation Recapture. If you enjoyed any tax benefit from depreciation in the past, that joy will end when you now pay "Income Tax Rates" not long term cap gain rates, on the difference between original purchase price and the depreciated value at sale.
