Stock Sale Planning
If you are selling your company’s stock, the gain will generally be taxed at preferential capital gains tax rates. Additional considerations may impact your overall tax picture. For example:
Qualified small business stock (QSBS). To stimulate the growth of small businesses and the U.S. economy, lawmakers have enacted various tax incentives for taxpayers who start and invest in small businesses. Individuals (i.e., noncorporate shareholders) holding QSBS may be eligible to exclude up to 100% of their gain from the sale of stock. The QSBS rules are subject to a number of restrictions.
In general, to qualify as QSBS, the stock must be issued by a domestic C corporation with no more than $50 million of gross assets at any time between August 10, 1993 (or when the qualified small business started), and the time the stock was issued or acquired by the taxpayer on original issuance, and the stock must be held for at least five years.
Tax-free reorganization. The Internal Revenue Code outlines several scenarios for tax-free business reorganizations, including a stock-for-stock exchange, known as a “B” exchange. If an owner selling a business receives stock of the acquiring company with an equivalent cost basis, he or she may defer capital gains taxes. This has potential advantages for buyers as well, especially those who don’t wish to deplete their cash reserves in order to make the purchase.
Employee stock ownership plan (ESOP). Since 1974, founders have been able to transfer ownership of their businesses to their employees through ESOPs. While ESOPs remain relatively rare (fewer than 6,000 corporations have ESOPs out of millions of privately held S and C corporations in the United States1), they offer significant advantages for certain companies and situations. The owner may transfer shares to employees and reinvest the proceeds in diversified securities, deferring capital gains taxes. Meanwhile, the employees have the opportunity to carry on the company’s legacy.
Pre-transaction charitable gifts of stock. A gift of stock to a qualified charitable organization in advance of a stock sale may be advantageous for the charity and for you personally. For example, if you contribute stock valued at $100,000 (in advance of the sale of your company), you may be able to deduct that full amount on your personal tax returns and avoid paying tax on the built-in gain on the stock.
If you wait until after the sale, you would be donating money already subject to federal and state capital gains taxes stemming from the sale. In real terms, your donation (and deduction) might be reduced to around $70,000.
Advance planning is essential. Donations made too close to the time of the sale could be deemed post-sale for tax purposes.
