Selling your company? Stock swap might avoid a taxable gain


Selling the stock or selling the assets are the two basic ways owners typically sell their businesses. For two good tax reasons, sellers usually prefer stock sales:

  1. Assuming you have owned the shares for more than a year, your profits will generally be taxed at a maximum federal rate of 20 percent. This applies equally to C and S corporations.
  2. You avoid double taxation when you sell C corporation stock, because the sale won’t trigger any taxable gain at the corporate level.

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 by swapping the stock in the company being sold for stock in the purchasing corporation.

However, there may 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.

How? You swap 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 stock-for-stock exchange strategy are:

  • You exchange your stock in the target C or S corporation for stock in the acquiring corporation. Your new shares will have the same tax basis as your old shares. In addition, you don’t have to report any taxable gain until you actually sell the shares. Result: The tax bill is put off indefinitely.
  • When you do finally sell, the IRS will tax the long-term capital gain at a maximum federal rate of only 20 percent (assuming the current capital gains rates remain in place).
  • If you die while still owning the shares, the tax basis will step up to fair market value as of the date of death. So, your heirs can sell the stock and owe little or no federal capital gains tax. (This assumes the current date-of-death basis step up rule remains in force.)

There is a small glitch for the buyer:  With a tax-free reorganization, the corporate buyer cannot step up the tax basis of your corporation’s assets. However, the buyer may be willing to overlook this issue when the acquisition can be made with stock rather than cash.

A tax-free reorganization 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.

The optimal scenario for a tax-free reorganization: You receive investment-grade publicly traded shares in exchange for your stock. This would give you great tax benefits but also a high-quality and highly liquid asset.

Stock-for-stock exchanges and tax-free reorganizations are complicated, so it is important to get help from experienced tax and legal professionals to handle the transaction.

If you need guidance on the tax implications of selling a business, leave us your contact information below and we will get right back to you.


FURTHER READING:

Family business owners may be able to defer estate taxes