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Could you sell your corporation for a capital gain and pay ZERO tax? Yes!

Posted by Tim Posted on Aug 15 2019

Tax Free Sale of your Corporation?Here's the nuts and bolts - and read the fine print, because not everybody qualifies...but many can and will.

Section 1202 allows that the owner(s) of the stock of a Qualified Small Business Corporation - or QSBC - can sell that stock on a tax-free basis.

If you take that and add that to the post-Tax Cuts and Jobs Act 21% corporate tax rate, you've got plenty to think about.  Imagine selling your small business and making a hefty capital gain - let's say you started up with $100K and you sell for $10M.  First...call me!  HA.  But seriously, congrats...and guess what?  That $990,000 capital gain MIGHT be FULLY TAX FREE!

 

Still reading?  Great...Here's the details

To qualify, you must have acquired your stock in the QSBC AFTER September 27, 2010.  Hint...if you haven't started your business yet, then you're in the clear here.  Then, you've got to hold your QSBC stock for MORE than 5 years to qualify for this tax-free treatment.

Then there are limits...specifically - the gain can't be greater (in other words, this is the max) than:

1. 10 times the aggregated basis in the QSBC stock you sell, OR
2. $10 million less the amount of eligible gains that you've already taken in prior years ($5 million if you file married filing separately).

Still in?  Yes...the limit is $10 MILLION in capital gains...OR MORE (if you invested over $1,000,000 in your QSBC stock).

 

So What is QSBC Stock?

The stock must meet the requirements setup in Section 1202 of the Internal Revenue Code.  Those include:

1. Generally, you must acquire the stock upon original issuance, OR through a gift or inheritance.
2. You MUST acquire the stock in exchange for money, other property that doesn't include stock, or services provided.
3. The corporation MUST be a QSBC at the date of the issuance of stock and during substantially all the period for which you hold it.

 

Other rules apply as well...of course

The corporation must be a domestic C-Corporation.  And it must satisfy an active business requirement - which is loosely defined as a corporation that uses at least 80% of its assets (by value) in the active conduct of a qualified business.

There's that dang "qualified business" again.  This is the biggest catch - and it catches guys like me since we are in the excluded group!  Qualified businesses do NOT include: businesses in teh performance of services in the fields of health, law, engineering, architecture, ACCOUNTING, actuarial sciences, 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.  Nor does it include business in banking, insurance, leasing, financing, investing, or  similar activities.  Farming (including timber-farming) isn't included either.  Nor are businesses in the fields of production and extraction of oil, gas, or other natural resources for which the percentage depletion deductions are allowed.  And those hospitality businesses - hotels, motels, restaurants - yep...they don't count either. 

But...if you're still standing...let's make sure this rule doesn't get you: The corporation's gross assets cannot exceed $50 million before the stock is issued and immediately after the stock is issued - including the amount received for the stock).

If you're still standing...still reading...and interested...there are more rules but we start splitting hairs.  It might be better that we chat.  Drop me a note, private message, or give me a call.