These are two of the most popular legal structures for small businessesand many small business owners have struggled over which is best for them.
In the states that impose taxes at death, the exemption levels are typically much lower than the federal exemption level. Also, farmland values have increased significantly in recent years, virtually matching in percentage terms the percentage increase in the federal estate tax exemption.
So, for larger agricultural estates, the increase in the exemption is basically worth about the same as it was several years ago.
Considerations When An S Corporation Is Involved The goal of most individuals and families is to minimize the impact of the federal estate tax at death.
For family businesses involving an S corporation, some sort of shareholder buy-out agreement is a practical necessity.
Over time, however, if that agreement is not revisited and modified, the value stated may no longer reflect reality. In fact, it may have been established when the estate tax was projected to be more of a potential burden than it is now.
The ATRA changes in the federal estate tax may be one reason, by themselves, to take another look at that agreement. However, there might be a better option to consider. A couple of recent cases provide guidance on this approach: In Bross Trucking, Inc.
He was the sole shareholder. The company got embroiled in some safety issues and ceased operations. That goodwill, the IRS also maintained, had been gifted to the sons.
The Tax Court disagreed, holding that the goodwill was personal to the father and did not belong to the corporation. Key to this holding was that the father did not have an employment agreement with the corporation and there was no non-compete agreement.
The lack of an employment contract or a non-compete agreement avoided the transfer of goodwill that might have been attributable to customer relationships or other corporate rights. That had the effect of reducing the corporate value and also reduced its value on liquidation an important point for C corporations.
In Estate of Adell v. Memoa similar strategy was involved with a favorable result. The point is that the value of a business is dependent on the contacts and reputation of a key executive. Thus, a business owner can sell their goodwill separate from the other business assets.
In the case, the decedent owned all of the stock of a satellite uplink company at the time of his death. Thus, the argument was, that a potential buyer only if the son was retained. These cases indicate that customer and vendor relationships can be an asset that belongs to the persons that run the businesses rather than belonging to the businesses.
Thus, those relationships personal goodwill can be sold and valued separately from corporate assets. Now, when the general plan will be to include assets in the estate to get a basis increase rather than gifting those assets away pre-death to the next generation, an entirely separate entity for the next generation of operators can also provide valuation benefits.
Another case on the issue, involving an S corporation, resulted in an IRS win. However, the case is instructive in showing the missteps to avoid: The lawyers involved in structuring the transaction "postulated" a technology transfer for significant value from the son to the parents that had occurred in The transfer was postulated because there were no documents concerning the alleged transaction executed in Instead, the lawyers executed the transfer documents in Note — This case represents a succession plan gone wrong.
The taxpayers in the case were attempting to transfer the value in their company which had been very successful to their children via another family business in a way that minimized tax liability.
As noted above, what was structured was a merger that was based on a fictitious earlier value transfer between the entities. The IRS claimed that the taxpayers had accepted an unduly low interest in the merged company and their sons had received an unduly high interest.
The Tax Court agreed. Other S Corporation Planning Issues.Election by a Small Business Corporation Department of the Treasury Internal Revenue Service Section references are to the Internal Revenue Code unless for a late S corporation election, ESBT election, QSST election, or corporate classification election are in effect.
See Relief for Late Elections. A: An S Corporation is a small corporation that elects to be taxed under Subchapter S of the Internal Revenue Code, which gives an electing corporation some, but not all, of the tax benefits of a. What Is an S Corp. Election?
by Edward A. Haman, Esq., November If you have organized your business as a corporation, you have a choice as to how your business will be taxed by the Internal Revenue Service (IRS). May 03, · Payment Plan (Installment Agreement) Electronic Federal Tax Payment System (EFTPS) Normal. S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
the corporation must submit Form Election by a Small Business . Mar 30, · The U.S. Tax Code allows corporate buyers and sellers of the stock of an S corporation to make a section (h)(10) election so that a qualified stock purchase* will be treated as a deemed asset purchase for federal income tax purposes.
Estate and Succession Planning With S Corporations. Roger A. McEowen. May 29, That will be the case if all of the assets of the entity are used in the entity’s business operations and the selling owner materially participates in the business.
an S corporation can make an election to divide the S corporation’s tax year into two.