Tax Planning

Wow! Imagine paying zero taxes when selling your business.

Yes, you are indeed reading the headline correctly. Just imagine, you started your C corporation business and just sold it for $5 million and you don’t owe any federal taxes at all on the sale! Thanks to good old (enacted originally in 1993) Internal Revenue Code §1202, along with some more recent tax law tweaks, the zero tax-bite is available for those businesses that are “qualified small business corporations” (QSBC).

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Of course, as with most things tax, there are a number of rules and details to follow and meet. You may even already have a tax code-defined QSBC. But, whether you are thinking of starting a business or if you already have a business and want to see if qualifying as a QSBC makes sense, paying zero taxes on the sale of your business stock is certainly a big incentive.

Then, additionally add to the benefit pile that the Tax Cuts and Jobs Act (TCJA) with its new 21% corporate tax rate, and it makes the small business corporation benefits potentially even more attractive.

The difference between a QSBC and a garden-variety C corporation is that if your corporation can qualify as a QSBC the stock sale is potentially eligible for:

  • a 100 percent federal income tax gain exclusion (think, tax-free capital gains), and

  • a federal-income-tax-free gain rollover break (again, think tax-free)

When QSBC status is available for a start-up business, it can potentially dictate against the conventional wisdom that operating as a pass-through entity (LLC, S corporation, etc.) is usually the right way to go. But, the only way to know is to perform the proper planning for business formation, finance structure, and taxes. This means getting together with your CPA in the planning phase of your business is critical.

What if you already have an existing business? Exploring restructuring far enough ahead of any potential sale of your business or time-frame when you think you may put your business on the market may allow you to take advantage of the QSBC benefits.

100% Gain Exclusion (Tax-Free Capital Gains)

To qualify for tax-free capital gains, you must:

  • acquire your QSBC stock after September 27, 2010

  • hold your QSBC stock for more than five years

And your tax-free capital gains from the sale of a particular QSBC. In any year can’t exceed the greater of

  • 10 times your aggregate adjusted basis in your QSBC stock you sell, or

  • $10 million reduced by the amount of eligible gains that you've already taken into account in prior tax years from sales of this QSBC stock ($5 million if you use married filing separate status)

The Devil is in the Details

Of course our lawmakers did not feel like including every business in this tax benefit. Qualified businesses do not include:

  • the performance of services in the fields of health, law, engineering, architecture accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any other business where the principal asset is the reputation or skill of one or more of its employees;

  • banking, insurance, leasing, financing, investing, or similar activities;

  • farming (including raising or harvesting timber);

  • production or extraction of oil, natural gas, or other natural resources for which percentage depletion deductions are allowed; or

  • the operation of a hotel, motel, restaurant, or similar business

Also, the corporation’s gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued (which considers amounts received for the stock).

Selling Before 5 Years?

For you serial entrepreneurs that get that offer you just can’t refuse before the five year qualification period has run there is a tax-free gain rollover deal for QSBC shares held more than six months.

Once you have more than six months under your belt, you can sell your QSBC shares and roll over your eligible capital gains to a new QSBC even when you fail the five-year requirement. The rollover provision allows you to sell QSBC shares on a tax-deferred basis without losing eligibility for the gain exclusion break when you eventually sell the replacement stock.

Too Much At Stake Not to Plan

I’ve touched only on some of the rules and issues for this valuable tax planning opportunity. But I wanted to give you a good handle on how this idea might work to your benefit. If you would like to spend some time with me or my team going over the possibilities for you, please call us at 831-758-5966 or email us at info@schollcpa.com. Your success is our bottom line.

The Rock Star, The Nude Estates and the Lithuanian Shopping Mall

We've all got an image in our minds of who uses "offshore tax havens" to host their business. Let's say you're a junior-varsity Russian oligarch. You've spent a lifetime looting your country's resources like an all-you-can-steal buffet, and now it's time to take some of your chipskis off the table. You buy a flat in London's posh Mayfair, or maybe a condo overlooking New York's Central Park. Then you stash the rest of your rubles in some sunny flyspeck of an island like Bermuda or the Caymans, where Putin's goons can't steal them back.

But most people who do business offshore aren't crooked billionaires. They're perfectly legitimate multinational corporations, business owners, and investors just like us. If you've worn shoes from Nike, made calls on an iPhone, or downloaded music from Sheryl Crow, you've even done business with them!

Star Power

On January 23, the IRS began accepting 2016 tax returns, and that means refund season is officially here. For 2017, the IRS expects 70% of Americans will get refunds, and those refunds will average around $2,840. Yes, if you're among that 70%, it means you paid in too much over the course of the year and gave the IRS an interest-free loan. (And no, they won't return the favor.) But millions of Americans still very consciously use their tax withholding as a savings account, and look forward all winter to receiving that sweet check.

That leaves just one nice problem to have — deciding where to spend it all.

It's Freezing Where?

Taxpayers across much of the Midwest and east coast have enjoyed a relatively light winter this year, with mild temperatures and little snow. But Old Man Winter made up for it last week. Temperatures dropped well below zero and wind chills broke records across the country. Friday morning saw thermometers dip below freezing in the Florida Everglades, and parts of North Carolina were colder than in Barrow, Alaska!

Care to guess where else temperatures have been falling? If you said "in Hell," you're right. That's because the House of Representatives, where gridlock appears to have found a permanent home, actually passed a bipartisan tax bill last week. The America Gives More Act would take three of those maddeningly "temporary" tax breaks that Congress barely manages to extend every year, and make them permanent. As the name implies, all three are intended to reward charitable giving:

State of the Union 2015

Hopefully you were not waiting until President Obama’s State of the Union address on January 20 to hear about his plans to shake up the tax laws. After all, the details of his tax plan had been leaked days earlier and the entire text of his speech was posted online before the event.

Apparently we have a new State of the Union address tradition. In each of his six previous State of the Union addresses he also proposed tax hikes.

Here are the more significant tax provisions that were proposed.

Master This Green!

The calendar may say that spring officially begins on March 21. But for millions of golfers across the country, the season didn't really start until this weekend — specifically, when Bubba Watson outplayed 20-year-old phenom Jordan Spieth to claim his second green jacket at the 2014 Masters.

Augusta National Country Club, home of the Masters, is America's temple of golf. Augusta's "perennial ryegrass" fairways are manicured to a smoother finish than your living room carpet, and its greens are so hard and fast you could play billiards on them. So, with all that lush green stretching as far as the eye can see, would it surprise you to learn that the residents of Augusta have "mastered" a lucrative tax break? It's become so identified with the legendary golf tournament that it's known as "the Augusta rule." But if you own your own business, you may be able to take advantage of it yourself.