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May 1, 2005

How to Get Money Out of a Closely Held Business at the Least Tax Cost.

#Tax Advisor, #2005 Archived

Tax Law is a lot like surveying the surface of the ocean. Constant change in the tax laws brings opportunities to the surface for the keenly observant.

For example, 20 years after S Corporations became generally available, there are still many C Corporations operating and paying taxes. A C Corporation pays taxes on its income and then a second level of tax on the distribution to its owners. An S Corporation election can not only eliminate this second level of tax, it can reduce payroll taxes and gain on the sale of the business as well. This can dramatically reduce income and capital gain taxes.

One of the big impediments to conversion to an S Corporation is Section 1374, [built-in gains taxes] which provides for a 35% tax on appreciated property in the C Corporation effective in the year of the election. In the case of a cash method taxpayer, the net tax on accounts receivable is approximately 68%. Recently, after much study, we had the opportunity to create a strategy for a C Corporation client to successfully avoid the impact of Section 1374. If you have a successful C Corporation as a client, we invite you to discuss the impact of this planning idea with us.

A second idea involves clients who are proactive enough to want to transition out of the business and who may want to either sell the business or transfer the business, while retaining a sufficient cash flow to fund their retirement. The greatest tragedy is the death of the owner without any planning. The value of the business collapses while the heirs and spouse “try to determine what the owner might have done”. The greatest advisor is one who provides counsel while there is still time to act. While each client situation is unique, we have been able to fashion a number of creative solutions to maximize the transfer of wealth to the current owner while permitting the successor to operate the business at the lowest possible tax cost. The first step is to obtain a clear idea of the goals of the owner of the business and then fashion a solution from those goals. Let's talk about it today!

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