Tax Guru – Ker$tetter Letter

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Archive for August 10th, 2007

Valuing S Corps

Posted by taxguru on August 10, 2007

Q-1:

Subject: SUB S CORP SHARE VALUE

Dear Kerry;
I have spent an afternoon on the internet trying to get some general information about this subject, without success. Our family has a Sub S Corp trucking company which is now 5 years old and is doing quit well. Onginally we set my youngest son up as sole incorporator and he takes 100% of the Sub s schedule k-1 on his personal incme tax return. We would now like to sell some shares of stock (ownership) to my older son and daughter. How do we figure out the value per share to charge my older son. It is not so much to make money but what the accountant and the IRS will accept.
Thanks


A-1:

There are several different ways to value small businesses, each yielding very different results.

Rather than have a professional business appraiser give you all of those value, it is generally easier to decide, for your current needs, if you want a high or low value and then work with your professional tax advisor to draw up an analysis to justify that number.  That will be a lot quicker and a lot less expensive for your needs.

Everyone involved needs to sit down and look at the short and long term aspects to whatever value you use.  A high value will possibly generate a capital gain for your youngest son, depending on what his current adjusted cost basis is for the shares he will be selling.  That will also give the new shareholder a higher cost basis to start with.

Conversely, a low share price will generate less capital gain, or possibly a capital loss for your youngest son, but will give the new shareholder a lower cost basis to start with. 

Again, working with your professional tax advisor, you may want to start by calculating the break-even cost basis of your youngest son’s shares and then have your tax advisor back into a calculation method that would justify that value for the shares. 

Good luck.  I hope this gives you some ideas of issues to discuss among yourselves and with your professional tax advisor.

Kerry Kerstetter

Q-2:

Kerry:

Thank you for the response. I would like to pay you for some consulting time to explore this issue further.First of all there was a typo, in that our trucking company has been in existence for just over 11 years.  Second, the reason for the change in ownership is there is a pending divorce. He has a prenup dated 7/2/2000, excluding the companies value prior to that time.

Our present accountant is a family friend and we wish to keep him out of the loop at this time. From the information you gave us it appears that a low share price would be desirable, but would it stand the scrunity in the divorce court.  We intend to consult an attorney once we establish the price per share and the logic by which it is derived.  Could we pay you to help us arrive at a reasonable price per share, along with the reasons used to get there? Could we provide you with our financial figures to give you something tangible to work with? I further suspect that upon the share price determination that the company Articles of incorporation along with the stock retirement agreement would have to be amended.

Thanks

A-2:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You all will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you. 

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

 

 

Business Plan Pro

 

Posted in corp | Comments Off on Valuing S Corps

Gifting Appreciated Assets

Posted by taxguru on August 10, 2007

Q:

Subject: Re: Gifts Tax Free For Recipients

Good morning, Kerry.   I’m assuming the question had to do with cash gifts rather than of appreciated assets.  I’ve seen some surprised people when the recipients of appreciated assets were told that they received the basis of the donor.

 

In our charitable giving world, we tell people to, where possible, give cash to family and appreciated assets to charity.

A:

That particular email did have to do with cash; but you are correct in noting the carry-over basis aspect to non-cash gifts.

As I have discussed on a number of occasions, it is a bit more complicated than simply donating appreciated assets to charity.  Another part of tax and gifting plans often involves deciding which family member has the lowest tax bracket and either gifting or holding those assets so that person can sell them with the lowest tax bite. 

Thanks for writing.

Kerry Kerstetter

 

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in Gifting | Comments Off on Gifting Appreciated Assets

Gifting plans need professional guidance

Posted by taxguru on August 10, 2007

Q:

Subject: Re: Skirting Gift Limits

The following is, of course, a great technique.  However, I’d use your typical admonition to engage the services of a qualified tax professional to make sure that this arrangement doesn’t trigger the imputed income rules.

 

“A common technique used to get the cash into the childless couple’s hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years.”

 

Thanks.

 

A:

That is absolutely right.  I would hope that, after years of warning people how dangerous it is to function without the assistance of competent professional tax advisors, it would go without explicitly stating that every time.  However, it doesn’t hurt to remind people of that fact once again.

Kerry Kerstetter

 

  

 

Posted in Gifting | Comments Off on Gifting plans need professional guidance

Shifting Income

Posted by taxguru on August 10, 2007

Q:

Subject: S vs. C Corporations

Hi Kerry,
 
Thanks for the article “S vs. C Corporations” I got a lot of information from it.
 
I have a question for you, in the section of Fiscal Year you mentioned ” Toward the end of your personal fiscal year (12/31), you bleed off some of your taxable income to your C corp by paying it for something like rent or marketing services. In Jan, your corporation can pay it back to you.”  How I do that? If it possible you give me a detail sample?
 
I have a C corporation for several years, but never know any way to save tax. Please advice.
Thanks!
 
Best regards,

A:

Your big mistake has been in not working with an experienced tax professional who can show you how to properly utilize a corp to dramatically reduce taxes.  This should have been done from before establishing your corp so that you could start saving money from that point on. 

The income shifting techniques are not complicated and I have described many of the basic steps several times on my blog.  However, you shouldn’t try to set up the strategy on your own.  The assistance of an experienced tax pro is essential.

Good luck.

Kerry Kerstetter

 

 

 

 

Posted in corp | Comments Off on Shifting Income

How to spoil an auditor’s day…

Posted by taxguru on August 10, 2007

Posted in audits, comix, IRS | Comments Off on How to spoil an auditor’s day…