Time-sensitive tax questions re: selling shares

[Kayak24]

Thank you for your help; need to decide before 12/31 and accountant is on vacation.

If someone sells 100% of his/her shares in an S-Corp effective 1/1/18 and elects to be paid over ten years in equal installments, when and how do the capital gains tax liabilities hit?

This person is looking at a $15k increase in value over her basis. Does the $15k hit as a lump sum in the 2018 tax year or in ten yearly increments relative to the date of respective redemption payments?

Also, where does these capital gains appear on a tax return? Same place as if the person sold Apple stock in a brokerage account for a gain?

Thank you so much.

[allyphoe]

If you sold the shares 1/1/18, there’s nothing to be decided now.

You can elect with the tax return to pay all the tax on the gains in the first year, or prorata to the principal payments received (over the 10 years). You’ll have taxable interest income each year, regardless.

There’s an intervening schedule for an installment sale, but the income ultimately ends up in the same place as Apple sold through a brokerage, yes.

[thumper1]

@kayak24 is this person you? Or someone else?

If it’s you…luckily you don’t need to make a tax decision right now…because…after all…it’s December 30.

[Kayak24]

Hi Everyone, Thanks for your responses.

@allyphoe
Clarification: I did not yet sell the shares. I’m about to and I need to decide between 1/1/2018 and 1/1/2019.

@thumper1 , Yes, this pertains to me and, yes, I do need to decide before tomorrow. It’s a family business and you can sell the shares effective Jan 1, 2018 as long as both parties agree. My uncle wants the check cut and deposited Dec 31st if we go with a 1/1/2018 redemption date.

The reason any of this is relevant is bc of college financial aid. 2018 is the base year for my 2nd child (two kids will be in college). 2019 is the base year for my third child (three will be in college).

My first child is a freshman in a meets-full-need college right now, so income is highly relevant.

Ultimately I have to decide what is the lesser of the evils: the company reporting (but not distributing to me) income again to my taxes (roughly $5k - $7k) via K-1 form plus the shares showing as an asset, or a larger capital gains event if it all has to hit in 2018.

Thoughts? Thank you

[blossom]

Have you looked at the rest of your portfolio to see if you’ve got some losses to take which can offset the capital gain?

[allyphoe]

You’re going to have the asset regardless. It’ll be in some combination of cash and note receivable, or it’ll be stock.

[happymomof1]

If this does mess up a financial aid package, you can ask the aid office to re-evaluate the package given that this was a one-time event.

and/or

Encourage kid2 to take a gap year so the base year is different.

[Kayak24]

@blossom , I do have a stock at Vanguard that tanked and I could take roughly an $800 loss on that if I sell it, but I’m always unsure of the best strategy since I believe that stock will go back up at least somewhat. These questions are all part of the selling in 2018 versus selling in 2019 decision too. I wish I knew more about this field and I also wish I knew how the FA dept weights things to help guide my decision.

[Kayak24]

@allyphoe , what an important point about the asset. I hadn’t realized that if I chose a payment plan versus lump sum buyout, the note would be part of the picture too from a FA perspective. I guess I’d have to disclose the note even though payment to me can be suspended depending on the sales/profits of the business from year to year. So much to think about.

[politeperson]

Recall also that tax treatment of pass through entitiy income changes this year if certain conditions are met—20% deducted from that business income on personal taxes I believe. Not sure if this affects your calculations, and it’s also not clear how FA offices will treat that change.

[Kayak24]

@politeperson , Good point. I know that the business only pays us for our tax liability and has already deducted that 20% from what they will give us, but that doesn’t mean the FA won’t hold it against us. (Sigh)

[allyphoe]

So the business does make a tax distribution? You’d originally made it sound like you were getting pass-through income with no distributions at all.

Having a retroactive sale (which IMHO is an iffy situation in general) is going to complicate that, because you’re only entitled to the distribution if you’re a shareholder on the record date. Assuming the record date was far enough past 1/1/2018 for the 2017 profits to be calculated and the amount of the tax distribution known, you may owe that early 2018 payment to the buyer if you have a 1/1/18 effective date. You need someone with some legal experience to read the corporate documents to know one way or the other.

And you’re taking the installment sale contingent on the future success of the business? And you’re doing all of this in an attempt to maximize financial aid, rather than because you want out? Picking a week when your accountant and attorney were available probably would have been a better choice.

The initial tax question was straightforward; the rest of it is impossible for anyone who isn’t privy to the whole picture to do more than speculate on, and speculation from random internet strangers is not what you want to be basing financial decisions on.

[Kayak24]

@allyphoe , You are correct that it’s complicated and I believe I have confused people by the way I’ve explained it. I am taxed on the pass through income and the business pays our tax liability but nothing more, so it appears to colleges that I have a much higher household income than I actually do. Pass through income is reported to FAFSA (and CSS Profile) as if it’s my actual income, etc., as you probably know.

The business is going to buy back my shares because I want out (for various reasons, not just because of their negative impact on the college financial aid formula). We were given a window of time where they will redeem and after that, they are not required to do so.

I only learned this past Thurs (at a meeting) that a 1/1/18 redemption was available, at which point I left a message for my accountant (to no avail). The following day I found out that a payment plan (versus lump sum) option was available. I figured that it was worth at least considering the idea of removing that pass-through income for the 2018 base year for child #2, and also worth considering an interest-included payment plan versus lump sum option. Seems too complicated the more I learn.

At this point I believe I’ll just take a lump sum redemption effective 1/1/19. The January date makes it a clean tax year and I won’t receive a K-1 in 2019.

Thank you all for your input.