S-corp sale/gift

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Joined: Tue Mar 21, 2017 11:39 am

S-corp sale/gift

Post by dpaznek » Sun Jul 16, 2017 12:14 pm

Hi All,

I am a long time employee (not a shareholder) in a two partner (50/50) owned S-corp. One of the 50% owners wants to start exiting the company and would like to transfer part of his ownership to myself and another employee at 10% each initially as next-generation planning. I am curious what the best way to go about doing this would be from a tax stance.

To give it some monetary perspective, company generates about $2-3 million and probably about $600-700k in profit. They normally make distributions to at least cover the taxes.

The owner is willing to gift the shares if legally possible...looks like the IRS restricts "gifts" over $25 from employers to employees, but I wasn't sure if this still applies for S-corp structure?

All the other ways seem to basically involve buying/selling in various ways and can generate a relatively big tax hit for both the selling owner and the buying employees which I guess makes sense as the IRS isn't going to let you have something for nothing.

Any advice would be greatly appreciated! Thanks.

Spirit Rider
Posts: 7540
Joined: Fri Mar 02, 2007 2:39 pm

Re: S-corp sale/gift

Post by Spirit Rider » Sun Jul 16, 2017 8:36 pm

The IRS only restricts the "company" to $25 gifts before it is considered income.

An S-Corp shareholder-employee can gift his shares subject to the gift tax annual exclusion (2017 = $14K/year) and the unified lifetime gift/estate tax exclusion (2017 ~= $5.5M), before any gift tax would be due. If the shareholder was married, the exclusion would increase to $28K/year and ~11M lifetime, but the spouses would have to file IRS Form 709 unless they were joint owners of the shares.

This would require determining the company's valuation and might require a stock split if there were very few shares at the S-Corp's creation.

The one shareholder-employee who wants to do this should get professional advice, there maybe other ways to accomplish this

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