Let’s say you’ve decided to sell your Maine-based business. There are two basic ways to sell an incorporated business: sell the assets or sell the stock. Sellers prefer stock sales because profits are generally taxed at a maximum federal rate of only 15 percent. Also, when selling C corporation stock, double taxation is avoided since the sale won’t trigger any taxable gain at the corporate level.
There may, however, be an even better alternative. If you can find another corporation to acquire your C or S corporation, you may be able to structure the transaction as a tax-free reorganization. The process involves swapping the stock in the company being sold for stock in the purchasing corporation. There is no current taxable income or gain for you, the target corporation you’re selling or the acquiring corporation.
The basic advantages of this strategy are:
- You exchange your stock for stock in the acquiring corporation. Your new shares will have the same tax basis as your old shares. You don’t have to report any taxable gain until you actually sell the shares.
- When you do finally sell, the long-term capital gain will be taxed at a maximum federal rate of only 15 percent.
- If you die while still owning the shares, the tax basis will be stepped up to fair market value as of the date of death. Therefore, your heirs can sell the stock and owe little or no federal capital gains tax.
The one small glitch for the buyer is that they buyer cannot step up the tax basis of your corporation’s assets. The buyer may be willing to overlook this issue when the acquisition can be made with stock rather than cash.
A tax-free reorganizations can potentially be structured in several different ways, including as a state-law merger, straight stock acquisition or asset acquisition. The best structure for your corporation may depend more on legal considerations than tax issues. Tax-free reorganizations are complicated so it is important to have an experienced professional handle the transaction. Contact Filler & Associates for more information.