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Roger L. Neu

 

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"C" Corp. v. "S" Corp

Question: Should I convert from a "C" corporation to an "S" corporation now that I am ready to sell?

An eleventh hour conversion from a "C" corporation to an "S" corporation will not work to avoid the double tax (tax at the corporate level and tax upon distribution to the shareholders) associated with an asset sale of a "C" corporation. Conversion to an "S" corporation will only provide for avoidance of the double tax on the amount of appreciation in value from the date of the "S" election.

Question: What are the consequences of selling assets instead of stock in an “S” corporation?

Buyers may prefer an asset sale because unwanted and unknown liabilities can be avoided by Buyer and Buyer obtains a cost basis in the assets equal to the purchase price. Generally an asset sale works well for the seller of an “S” corporation as well since the gain on the sale passes through directly to the shareholders. There are some additional taxes, however, that will apply in the sale of “S” corporation assets (v. sale of stock) which include; (i) 1.5% California income tax; (ii) “C” corporation income tax of up to 35% on gain attributable to the value of the corporation prior to conversion to an “S” corporation (if the “S” corporation conversion was made more than 10 years ago then there will be no “C” corporation tax); (iii) possible investment tax credit recapture if assets are sold prior to end of the applicable recovery period used to calculate the original investment tax credit; (iv) sales tax on value attributable to furniture, fixtures and equipment; and (v) if that portion of the purchase price allocated to depreciable assets is greater than their tax basis, the difference will be taxed at ordinary income rates instead of capital gains rates.


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