10 Sep Selling a C-Corp? Try These Tax Strategies
You own a C-corporation that you want to sell. You asked us not to beat you up for never switching to a pass-through entity and just help you reduce taxes. Okay, here you go:
- Sell Stock. This is much easier said than done. Buyers justify purchase price from the after-tax cash flow they expect to earn. If you require the buyer to buy stock, the price will be a lot lower. Why? Two reasons:
- The buyer’s after-tax cash flow will be a lot lower because he’ll inherit the tax basis in the acquired assets and his depreciation will, therefore, be lower.
- The buyer will be exposed to much higher levels of contingent risk. As risk rises, price falls.
Sure, every once in a while a buyer comes along who has more money than sense. But it’s very hard to get them to the closing table. And, as you know, there’s no such thing as a free lunch.
That being said, if you’re one of the few private companies that can attract a public suitor, publicly traded companies are much more willing to buy stock. This is because many of them are less interested in tax reduction or cash flow and more focused on maximizing near-term earnings. This will help your tax situation, but remember the free-lunch thing? Public companies usually want to pay you with shares of stock, not cash.
- Owner-Compensation Catch-Up: Because you own a company organized as a C-corporation, you know that the way to get cash out is through compensation and benefits. Dividends aren’t the ticket because they trigger a second level of tax. So, could this method be used to reduce double taxation in the sale of your business?
- Yes, it could. All you must do is figure out if you’ve been underpaid. If so, catch it up after you sell all the assets to the buyer but before you liquidate your company.
- So, if you calculate that you underpaid yourself by $750,000, pay it to yourself as salary. You’ll avoid the double tax on this amount. Of course, the IRS is not keen on pie-in-the-sky calculations that reduce their take. So you’ll need to put together a defensible case. For example, obtain credible data on what was fair compensation for a person with your talent, experience and duties, and use that to calculate the underpayment.
- Personal Goodwill. If you’re actively involved in your business and a portion of your company’s goodwill can be found to reside with you, personally, rather than with your company, then your company has no right to sell that portion of goodwill. Your “personal goodwill,” which is your services, talent, cooperation, experience and know-how, must be purchased directly from you. By doing so, the buyer pays money directly to you and you thereby avert double taxation on that money.
- Stock-Buying Middleman. You insist on selling stock and the buyer insists on buying only your assets – two sides that are diametrically opposed. God bless our free market, because darn it if there aren’t some middlemen to step in, for a fee, of course. Yes, there are a few middlemen willing to buy your stock, immediately after you’ve sold all the assets and before you’ve filed your tax return. Your company will hold only the cash proceeds from the asset’s sale and a big tax bill for depreciation recapture and gains. That’s when the middleman steps in and buys your stock. He’ll give you a price that is more than you would get if you simply paid the taxes and then liquidated by dividend. So the seller sells stock (or assets and then stock) and the buyer buys assets. How can the middleman afford to do this? Good question. Caution is merited because this arrangement does seem too good to be true. The few such firms that my partners and I have attempted to work with have not come through. These firms also have been unprofessional. On the whole, I don’t recommend this strategy.
Mark McGrath, CPA with Westbrook, McGrath, Bridges, Orth & Bray contributed to this article: www.wmbob.com.