Technical topics regarding tax preparation.
5-Aug-2021 1:19pm
- Posts:
- 5073
- Joined:
- 21-Apr-2014 9:42am
- Location:
- CA
S-Corp sells it assets for $5 million. The primary assets are it's intangibles. These are allocated $4.5 million of the deal and will be taxed as a capital gain.
The S-Corp has phantom share agreements with several key employees which will give them 20% ($1 million) of the deal.
On the day of closing, the S-Corp receives the $5 million and immediately pays out the $1 million to the employees.
Is the $1 million deducted against ordinary income or does it reduce the $4.5 million capital gain?
5-Aug-2021 1:24pm
- Posts:
- 6569
- Joined:
- 23-Apr-2014 5:27pm
- Location:
- Maryland
Ordinary income deduction. W-2 compensation to employees.
5-Aug-2021 1:30pm
- Posts:
- 5073
- Joined:
- 21-Apr-2014 9:42am
- Location:
- CA
That's what I was thinking. Since the employees pick it up as ordinary income then the deduction should also be ordinary.
But that's not always true.
Take, for example, if this was a stock deal and the employees had unvested options. The 80% owner would recognize 80% of the capital gain and the 20% employees would have ordinary income. In other words, for the 80% owner, their capital gain is the net amount after paying the compensation.
5-Aug-2021 1:34pm
- Posts:
- 6569
- Joined:
- 23-Apr-2014 5:27pm
- Location:
- Maryland
But phantom stock is not stock or options.
For clarification, I assume you mean the options for 20% vest coincident with the sale of the company (change in control)
5-Aug-2021 1:38pm
- Posts:
- 5073
- Joined:
- 21-Apr-2014 9:42am
- Location:
- CA
For clarification, I assume you mean the options for 20% vest coincident with the sale of the company (change in control).
Yes
I know am mixing apples & oranges.
The $1 million feels like an expense of the sale and should reduce the capital gain. The same as the attorney and accountant fees that are being paid in the deal.
5-Aug-2021 2:49pm
- Posts:
- 5749
- Joined:
- 21-Apr-2014 7:21am
- Location:
- The Land
The $1 million feels like an expense of the sale and should reduce the capital gain.
No way. This is an asset deal and we have a quick-vest under the phantom/SAR plan. This is compensation.
Take, for example, if this was a stock deal
If the S-election terminates as a result of such stock deal, the last day of the last S year will be the day before closing…which means the S doesn’t get any deduction (is my recollection).
5-Aug-2021 2:53pm
- Posts:
- 5073
- Joined:
- 21-Apr-2014 9:42am
- Location:
- CA
11-Aug-2021 2:03pm
- Posts:
- 2708
- Joined:
- 28-Apr-2021 7:00am
- Location:
- FL
Besides obviously being compensation, treating it as compensation is the most efficient because it reduces IRS revenues. (The additional employment taxes are less than the double tax on a capital transaction.)
Steve
Return to Taxation
Who is online
Users browsing this forum: beardenjv, gatortaxguy, Gjkycpa, Google [Bot], Google Adsense [Bot], lckent, missingdonut, newbie, pwmichaelsr, rkrcpa, SALYstrikesagain, SumwunLost, Terry Oraha, UnlicensedTaxPro and 109 guests