What are the Tax Consequences of Dissolving my Business?

Depends on whether you are operating as a sole proprietorship or a partnership or a corporation.  If you are operating as a limited liability company, it depends on whether you have elected for tax purposes to be taxed as a disregarded entity, partnership or corporation.  More on that in the next blog.

If your business is being operated as a sole proprietorship, the sale of the assets upon liquidation may trigger recognition of gain, loss and depreciation recapture.  Any such recognized gain, loss or depreciation recapture will be reported for federal income tax purposes on your personal income tax return.  You will pay tax at the rate of 15% on any long term capital gain. Short term capital gain will be taxed at the ordinary individual income tax rate.

If your business is being operated as a partnership or an "S" corporation, any gain, loss and depreciation recapture recognized on the sale of the business assets will be reported on the partnership or "S" corporation information return and allocated among the owners on Schedule K-1.  Each owner then reports and pays tax on such owners pro rata share of the allocated gain, loss or depreciation recapture.  The owners will pay tax at the rate of 15% on any long term capital gain.  Short term capital gain will be taxed at the ordinary individual income tax rate.  The distribution of the sale proceeds by the partnership or "S" corporation to the owners reduces the owners' capital account, but is generally not subject to tax so long as the owners have sufficient capital account.  More about capital accounts in a future blog.

If your business is being operated as a "C" corporation, any gain, loss or depreciation recapture recognize don the sale of its assets will be reported on the "C" corporation income tax return, and the corporation will pay tax on any gain or depreciation recapture at the corporate income tax rate (generally 34%).  There is no corporate capital gains rate.   Upon distribution of the sales proceeds to the owners of the corporation, the owners will report the distribution as a dividend and pay tax at the rate of 15%.  This is on top of the tax the "C" corporation paid upon sale of the assets.

The double tax aspects that result from liquidation of a "C" corporation is the main reason owners of businesses do NOT let their "C" corporation acquire appreciating assets.  Instead real estate and other appreciating assets should be acquired by an affiliated partnership, LLC or "S" corporation. 

If you are thinking about dissolving your business, or are thinking about how to best structure your business to avoid problems down the road, please give me a call or email.  Jsenney@pselaw.com or 937-223-1130. 

AND ONE MORE THING.  Under the federal income tax code, “S” corporations are not permitted to be owned by corporate shareholders.  So “S” corporations cannot be part of a parent-subsidiary consolidated group of corporations.  One way around this limitation is to use qualified “S” subsidiaries commonly referred to as “QSSS”.  More about how and why to use QSSS in a future blog.  Call or email me if you have a question about QSSS and can’t wait.  Jsenney@pselaw.com or 937-223-1130.

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