Facts
The client is an investor and majority shareholder in a qualified small business. He is considering selling his shares to an outside party who would take control of the business. Client is the controlling shareholder based on an $825,000 infusion of capital in 2008. The aggregate capital never exceeded $1 million. The client files jointly with his spouse.
Issues
* What are the tax consequences if the stock is sold for a loss?
* What are the tax consequences if the stock is sold for a gain?
* Are there any other factors that need to be considered?
Conclusion
Loss
If the shares are sold for less than his basis, the client will recognize an ordinary loss, up to $100,000. Any amount in excess of the $100,000 would be …show more content…
Loss
If the stock is sold for a loss the stipulations for recognition are outlined in IRC Section 1244; furthermore, the criteria was clarified in Adams v Commissioner. According to the information provided these conditions have been met, namely:
* Stock was issued by a small business.
* Stock has been held by the individual to whom the stock was originally issued.
* The client provided an infusion of capital into the corporation.
Net capital losses cannot exceed $3,000 each year; whereas, the ordinary loss limit is $100,000 on a joint return. Any amount in excess of the ordinary loss will be treated as a capital loss. Net capital losses cannot exceed $3,000 each year and would be carried forward and/or back to obtain the greatest tax benefit.
Gain
Furthermore, IRS Pub. 550 Chapter 2 indicates that, as a majority (greater than 50 percent) shareholder, the client can recognize the gain relating to a controlled entity as ordinary instead of capital gains. In addition, IRC Section 1202 allows taxpayers to pay tax on only 50% of the profit from qualified small business stock.
Other
The client is an investor and majority shareholder in a qualified small business. He is considering selling his shares to an outside party who would take control of the business. Client is the controlling shareholder based on an $825,000 infusion of capital in 2008. The aggregate capital never exceeded $1 million. The client files jointly with his spouse.
Issues
* What are the tax consequences if the stock is sold for a loss?
* What are the tax consequences if the stock is sold for a gain?
* Are there any other factors that need to be considered?
Conclusion
Loss
If the shares are sold for less than his basis, the client will recognize an ordinary loss, up to $100,000. Any amount in excess of the $100,000 would be …show more content…
Loss
If the stock is sold for a loss the stipulations for recognition are outlined in IRC Section 1244; furthermore, the criteria was clarified in Adams v Commissioner. According to the information provided these conditions have been met, namely:
* Stock was issued by a small business.
* Stock has been held by the individual to whom the stock was originally issued.
* The client provided an infusion of capital into the corporation.
Net capital losses cannot exceed $3,000 each year; whereas, the ordinary loss limit is $100,000 on a joint return. Any amount in excess of the ordinary loss will be treated as a capital loss. Net capital losses cannot exceed $3,000 each year and would be carried forward and/or back to obtain the greatest tax benefit.
Gain
Furthermore, IRS Pub. 550 Chapter 2 indicates that, as a majority (greater than 50 percent) shareholder, the client can recognize the gain relating to a controlled entity as ordinary instead of capital gains. In addition, IRC Section 1202 allows taxpayers to pay tax on only 50% of the profit from qualified small business stock.
Other