Discussion:Client (S-Corp) Selling his Bar - Depreciation

A client is selling his bar for $75,000 out the door. All the buyer cares about is how much depreciaiton he can get. Is there a difference between selling 100% of the S Shares of stock vs. selling the building, assets, etc?

Also, wouldn't the buyer be limited to his $75,000 basis each year there is a loss?

Confusing, I apologize but greatly appreciated.

Jas, girl, you need to get someone with some 'sperience to help. This affects the tax of your seller depending on which way he sells, and the depreciation or lack thereof, of the buyer. Which is why sales prices are often negotiated over the tax benefits.

In short, if the deal is a stock of the corp deal, the seller has 100% cap gain at cheap rates, but the buyer has no deduction at all, merely basis, which can be used when he sells, or against losses.

If it's an asset of the corp sale, where the corp is busted up and liquidated, the seller has deprec. recapture at ordinary income rates (or 25%?) and only then, cap gains on remainder. Perhaps some ordinary income on sale of inventory, etc. The buyer, on the other hand, gets to write off everything between now and 15 years depending on the make up of the deal and values agreed upon to each class of asset.

The bar will sell for $75,000. He has taken roughly $17,000 in depreciation.

Thanks again!

My client, the owner - does he realize a gain with basis over and above? What happens to his basis? Thanks again

So what happens to the assets when the stock is sold at 100% - complete sale...how do the assets work?

Is it only at 100%?

For the seller, again, it doesn't matter. He's got a loss on the sale no matter how you do it.

1. A stock sale, which JR1 has already discussed. Just a normal sale of the stock, and everything inside the corp just continues on. 2. An asset sale, in which the assets are sold to a new buyer. The corporation simply sells the assets for the allocated portion of the purchase price (See Sec 1060 and Form 8594). The gains/loss on disposal of the assets passes through to the shareholder, and ultimately, the S corp will likely distribute any remaining cash to the shareholder. The shareholder will recognize gain/loss from both the pass through income, but also from the final liquidating distribution against his remaining basis. The buyer usually prefers this because they get basis in depreciating assets and can get a quicker return on their investment via depreciation deductions. This usually costs the seller some tax dollars because rather than having all of the gain recognized as capital, some of the gain will likely be characterized as ordinary. 3. A stock sale treated as an asset sale for tax purposes (a 338(h)(10) election). This gives the buyer and seller the same tax effect as if it were an asset sale, but for non-tax purposes, the buyer and seller decide that the stock sale is the way to transact the sale.

This is an oversimplification of the deal, but very important for you to understand the basics. The devil is in the details, and you really need to read up on this to properly serve your client.

What other info would be useful? Listing of assets w/ AD?

What other info would be useful? Listing of assets w/ AD?

Kidding. Got what you are saying Kathi. So, assuming they are not, it's a capital loss or split. What about if the asset NBV is $50,000 and we sell for $75, 000. How does the excess/deficit get calculated?

Final question. It's a stock sale. Assets at nbv are less than fmv. How does the buyer begin depreciating? Fmv from year 1? Does he have 179(buyer).... Thanks...his basis of $140k will generate the loss from a $75k sales price less the difference in the inventory?

Too many ?s. Sorry.

Wow. How did you know?

So that's why the buyer and seller have settled on a price without really knowing what it is that they're buying and selling!!

thought?

He's a multi millionaire.

$60,000 of that is being amoritized, liquor license, start-up fees, etc...what does the buyer do with these if it is a stock sale? Keep amot. the way they are or is it the NBV now and start over?

We have bar construction of $20,000 and then everything else is just Misc. items.....the one thing I just need to grasp is how the buyer begins depreciating these items....if he sells the stock, is it the current NBV or he just takes over the way it is. Sect. 179 allowed?

stock sale would be nothing chnages but ownership....

If we meet with the buyer and the purchase price is $75,000 is their a fair way for both to win...for the buyer to get a big depr write off in year 1 and the seller to take a good size loss?

Allocate it all to GW? or consulitng?

Sale price of either asset or stock sale will be $75,000 my client is the seller...so his loss recognized, as we mentioned is a sect. 1244 for an asset sale, ord loss - $65K? 140-65K?

Thanks again!

Sale will take place 1/1 for $75k. Stock sale.

Are we sure it's 1244? Can't find the support

Stock basis is 103k. Debt is 140k. Is his loss $28k?

Full amount is allowable, right? Not a capital loss!

I'm not certain it qalifies as a Section 1244....wondering the reasoning behind it as well. Does something additional need to be done to have 1244 stock even if he is the original order?

My thought is that it's either a capital loss or 1231...again, not my speciality. Hopefully someone can assist you with the calc.

103+140-75 does NOT equal -28

if you don't know the answer, that's ok as well....

Jasmine - you would need to look at the changes in your TP's stock basis from the beginning of this business. Qualifying under 1244 means the TP must be the original owner of the stock (he didn't buy from somebody else). Original basis for stock and paid in capital is one portion of basis. Then over the years you have additions for taxable income, reductions for losses, reductions for distributions etc. If basis is positive for both these calcuations, you must pro-rate the sale ratably. Only the portion of the sale applicable to original stock and PIC is eligible for 1244. The portion of the sale applicable to a net basis increase from adjustments does not qualify for 1244.

CAPITAL STOCK 500.00

PIC 217,450.00

2007 LOSS (59,632.00)

NOND. EXPT (10.00)

2007 STOCK BASIS 158,308.00

2008 LOSS (55,178.00)

2008 NONDECT (31.00)

  TOTAL	         (55,209.00)

12/31/2008 BASIS 103,099.00

SOLD FOR $75,000 STOCK SALE

THANKS!!

TOTAL loss, yes?

then the add-on to the debt basis would just be capital loss.....

Capital Stock 500 APIC 217450 Loan from Shareholder 140000 Losses (114851) Total Liab. & S.E. 243099

Fixed Assets & Intangibles 130000 Depr. & Amort. (28000) Net Assets 102000

There could be numerous reasons for this difference, but I suspect the $140,000 loan is a personal loan that was used as part of the $217,450 of APIC.

So since the sale went for $75k. Is the first loss of $28k the 1244 loss? Recognized in full?

Then the additional loan of the $37k, if not repaid, capital loss?

Just trying to finalize the tentative personal tax return.

That's my last ? Thanks so much for everything. Apologize for the annoyance.

______________________________________________________

Sec. 1244. Losses on small business stock

TITLE 26, Subtitle A, CHAPTER 1, Subchapter P, PART IV, Sec. 1244. STATUTE

   (a)   General rule
   In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss. 
   (b)   Maximum amount for any taxable year
   For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed -

       (1)   $50,000, or 
       (2)   $100,000, in the case of a husband and wife filing a joint return for such year under section 6013. 

   (c)   Section 1244 stock defined

       (1)   In general
       For purposes of this section, the term "section 1244 stock" means stock in a domestic corporation if -

           (A)   at the time such stock is issued, such corporation was a small business corporation, 
           (B)   such stock was issued by such corporation for money or other property (other than stock and securities), and 
           (C)   such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities. 

       (2)   Rules for application of paragraph (1)(C)

           (A)   Period taken into account with respect to new corporations
           For purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5-year period -

               (i)   the period of the corporation's taxable years ending before such date, or 
               (ii)   if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date. 

           (B)   Gross receipts from sales of securities
           For purposes of paragraph (1)(C), gross receipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom. 
           (C)   Nonapplication where deductions exceed gross income
           Paragraph (1)(C) shall not apply with respect to any corporation if, for the period taken into account for purposes of paragraph (1)(C), the amount of the deductions allowed by this chapter (other than by sections 172, 243, 244, and 245) exceeds the amount of gross income. 

       (3)   Small business corporation defined

           (A)   In general
           For purposes of this section, a corporation shall be treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued. 
           (B)   Amount taken into account with respect to property
           For purposes of subparagraph (A), the amount taken into account with respect to any property other than money shall be the amount equal to the adjusted basis to the corporation of such property for determining gain, reduced by any liability to which the property was subject or which was assumed by the corporation. The determination under the preceding sentence shall be made as of the time the property was received by the corporation. 

   (d)   Special rules

       (1)   Limitations on amount of ordinary loss

           (A)   Contributions of property having basis in excess of value
           If -

               (i)   section 1244 stock was issued in exchange for property, 
               (ii)   the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and 
               (iii)   the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time, then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii). 

           (B)   Increases in basis
           In computing the amount of the loss on stock for purposes of this section, any increase in the basis of such stock (through contributions to the capital of the corporation, or otherwise) shall be treated as allocable to stock which is not section 1244 stock. 

       (2)   Recapitalizations, changes in name, etc.
       To the extent provided in regulations prescribed by the Secretary, stock in a corporation, the basis of which (in the hands of a taxpayer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the requirements of subsection (c)(1) (other than subparagraph (C) thereof), or which is received in a reorganization described in section 368(a)(1)(F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. For purposes of paragraphs (1)(C) and (3)(A) of subsection (c), a successor corporation in a reorganization described in section 368(a)(1)(F) shall be treated as the same corporation as its predecessor. 
       (3)   Relationship to net operating loss deduction
       For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer. 
       (4)   Individual defined
       For purposes of this section, the term "individual" does not include a trust or estate. 

   (e)   Regulations
   The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section. 

SECTION REFERRED TO IN OTHER SECTIONS

   (C)   Information required to be furnished to the Secretary
   Under regulations, where an election is made under subparagraph (A), the purchasing corporation and the common parent of the selling consolidated group shall, at such times and in such manner as may be provided in regulations, furnish to the Secretary the following information:

       (i)   The amount allocated under subsection (b)(5) to goodwill or going concern value. 
       (ii)   Any modification of the amount described in clause (i). 
       (iii)   Any other information as the Secretary deems necessary to carry out the provisions of this paragraph. 

The election may well invite the Service to request "Any other information the Secretary deems necessary"

He is the original owner of the scorp. He had the bar since 2007. Two years of losses. No distributions.

Stock basis Is about $103k with a loan on the books for $37k making his total basis $140k.

Sells the stock for $75k.

Can I just net the basis and cash received and take the entire loss in 2009?

Not sure it matters what loss it qualifies as. Just a capital loss at $3k a year would be the worst case.

I'll buy lunch for an answer...ok, Xmas present too. Please? Lol.

However, there may still be a problem with the loan. Since the client is selling stock, then I assume there is no money to repay the loan? Therefore, you will need to review the treatment of the write off of the loan. I believe if you can treat the loan as a business bad debt, then it also becomes and ordinary loss instead of a capital loss.

Another option to consider if the parties are agreeable is a sect 338 election. A 338 election essentially allows a stock sale to be treated an asset sale. You might want to review the 338 rules to see if you would qualify and if so, suggest that the parties make such an election as both parties must agree to it and it would appear that it might be beneficial to both.

My gut feeling is that you should start with the 1244 rules and the bad debt rules, because if you qualify for 1244 on the stock sale and “business bad dabt” treatment on the loan balance, then you are good to go.