Preferred S Corp Sale Structure

[Guest mogulbumm]

I am in the process of structuring a sale of my business to my business partner. It is an IT services firm and the deal is based on a value of the company derived from existing client agreements. We maintain no inventory and all assets were purchased on a section 179 deduction.

I am receiving the payment via 25% up-front, and 25% each year for three years.

I would like to structure this to minimize tax liability via a stock sale to structure it on long-term capital gains basis.

I do plan on meeting with an accountant but would like to be as educated as possible prior to my engagement so I have a few questions.

1. Will I be taxed in this tax year for the entire sale price of the business, regardless of whether the business sale is financed over 3 years?

2. Pursuant to the above, what are some creative ways to structure this?

Given the options, I simply won't have enough money to pay the full capital gains up front (this is going to be my short-term income for living expenses) but would like spread the tax liability out over the term of the payments. The buyer has some flexibility in working with me on the tax structure of the deal. I'm trying to avoid showing this as ordinary income.

Thank you in advance for any advice!

[michaelmars]

This forum is for tax professionals, my advice is for you to consult with one.

[Jack from Ohio]

Spend the time you took to post here to locate a tax professional in your area who is knowledgable in this area. His experience and knowledge in this matter will be worth whatever he charges.

Would you dictate to me, without cost, the best way to increase the flexibility of my network and the proper equipment to replace?

[Guest mogulbumm]

Apparently I hit a nerve here and I apologize. I had misinterpreted the use of this forum. Per my post, I fully plan to consult with a tax professional before making a decision, but also intend to try to educate myself as much as possible and I was hoping that some of the experts here would have a few options to look into.

And in response to Jack, my answer is YES. I have done numerous FREE lunch and learn sessions, webinars, etc.. with the sole intent to provide information, benefits, and disadvantages on such items as cloud computing, compliance, and electronic discovery preparation. While I would certainly shy away from making specific recommendations without knowing full details (or for that matter engaging in an agreement for services), I would absolutely go over generalities and things to look for and ask with respect to some of the benefits and disadvantages of certain systems and methods. And I do participate online to facilitate such knowledge.

So I was simply looking for ideas on creative ways that tax professionals have used to structure deals. I'm sure that none of you are so versed to have ALL of the options in hand, but if anybody has been involved in such a process it would help during my discussions with a tax professional. Perhaps I would understand the advice better and be in a better position to make an educated and informed decision.

If this came across as a demand for free tax advice, it was NOT the intent.

[Jack from Ohio]

.... I would absolutely go over generalities and things to look for and ask with respect to some of the benefits and disadvantages of certain systems and methods. And I do participate online to facilitate such knowledge....

Exactly my point. In general, when a person is in your situation, you should consult a knowledgable and trusted tax professional.

[Lion EA]

You really need to sit down face-to-face with your tax advisor so you can go back and forth in real time to explore your issues. Some starting questions for you to discuss would include why your partner is willing to accept a stock sale when an asset sale would be more beneficial and less risky (unknown liabilities, etc.) to him, why you're not selling him 1/4 of the stock each year, what are the terms of your non-compete, is your lawyer sitting in on your meetings, will his lawyer and tax advisor join you to work out the sales contract details, what other types of income you (and your spouse, if married) expect and what amounts over the next four years, what you will do if your soon-to-be-ex partner defaults, etc. Your tax advisor's questions will depend on your information to him and cannot be predicted in a vacuum. You can find lots of reading material online and in a good business library to bring you up to speed on the generalities.

This is a site where tax professionals discuss tax issues among ourselves. As you said, no one can know everything, so we can get advice from and share with colleagues, especially those that use ATX tax prep software. Your tax preparer may be here. Do you really want him to think that you trust him so little that you had to start with other pros before him!

[MAMalody]

IRS Publication 544 speaks to the dispositon of assets. Publicatioin 537 speaks to installment sales. Publication 4681 speaks to canceled debts, foreclosures and repossessions. Publication 4849 speaks to not being able to pay taxes you owe. These are all free at www.irs.gov. If you are a good study, they will help give you some general information. Tax professional will tie the tax implication knot for you, however, he may need to be guided by an attorney based on the facts and circumtances of your situation and other nontax issues. Good luck.

[JohnH]

I have seen several sales of this type go well, and also one which went terrilbly wrong. The one which went wrong was instructive, because the sale was structured to take advantage of potential tax savings while leaving the seller exposed to some unlikely problems. Naturally, the unexpected happened and the seller wound up wishing they had focused on legal protections at the expense of saving a few tax dollars. (I came into the picture after the fact, and had nothing to do with the original arrangement)

My advice is to focus on the legal aspects of the sale and be sure your interests are protected there in your initial planning. After that, look to the tax aspects for making adjustments, but be sure you dont sacrifice thousands of dollars of legal protection in order to save a few hundred dollars in taxes (or simply the timing of tax payments).

You said in your orignal post that you are planning to meet with profesional advisers - smart move. Find a good lawyer and a qualified tax pro, then listen to their advice. Hopefully you've located people who have experience with this sort of transaction. Their services wont come cheap if they are good, but they will pay for themselves many times over.