By Andy Frye
One of the major advantages of a “live” course is the ability to ask questions to your instructor. Especially when it comes to a complex topic like learning about corporation tax preparation, it’s natural to want to ask questions.
For this reason, we are proud to say that the new Pronto Tax School online learning platform for tax professionals allows our Members to ask questions to instructions directly from within their online courses.
In this blog post, I wanted to share a question that was asked in our new corporate tax training course, The Business Tax Verified Program with CPA Adam Shay. This way you can see how the ask questions function works in our online corporate tax training program.
The $850,000 Question
Here is the question that came in from one of our Business Tax Verified Members:
I have a potential client that is going to be getting 850k from a corporation that he owns 25% of the shares. Does he have to pay taxes on that money if he is going to be putting it in another corporation? Can you please help me with this or point me in the right direction.
Now the tax professional who sent us this question, he also offers services of:
- Group Benefits like Health Insurance and 401K’s
- Commercial Lending
The nice thing about learning how to do tax work for corporations is that it’s very easy to get Return on Investment (ROI) from your tax expertise in the area of corporate taxes.
The average corp return preparation runs about $1,000 in annual tax preparation fees and there are all kinds of other tax consulting and tax problem resolution fees that come along with working with corporation tax clients.
My point here is that this question has the potential to grow into so much business for this tax professional–as long as he “comes correct” with an answer that builds trust with the prospect, this type of client will generate a significant amount of revenue for this tax professional for years to come.
Need More Information
One thing I loved about studying under CPA Adam Shay while creating the Business Tax Verified Training Program is his style of turning people asking “casual” questions into lifetime clients.
Following that model, the first part of my answer would be that the tax professional faced with answering this $850,000 question may want to consider saying something like:
“That’s a great question. The thing with the tax code is, there’s not always a simple answer, and there are multiple ways we work with clients to achieve the lowest tax result depending on the facts and circumstances. The short answer would be, ‘It depends.'”
Likely at that point the potential client will want to know, “Well, what does it depend on?”
If you are already perceived as a trusted advisor, you can then set up an appointment to talk through the client’s situation in greater detail, and turn that into a paid tax planning engagement.
We do not recommend answering $850K tax questions on a non-paid basis. Whenever possible, with larger issues like this, work to turn the question into a paid consultation.
The “Straight Answer”
Now maybe you’re thinking, Wow, that’s a weaselly answer. Shouldn’t you just tell the client what the scoop is?
This is the scoop:
The $850,000 sounds like it was a sale of stock.
We would have to do further investigation into the matter in order to determine if that assessment is correct, but that’s what it sounds like: that this person sold his 25% share of the corporation for $850,000.
If that’s the case, the client would pay capital gains tax on the gain from the sale.
So, you would take the “basis” of the stock, and subtract that from the sale price to arrive at a taxable gain.
Same concept as if the client sold stock in a corporation traded on the NYSE.
Now depending on whether this is an S corporation or a regular corporation, there are various considerations that go into calculating that basis figure which acts as the “starting point” for determining the taxable gain amount. Particularly with an S corporation, basis is a moving target because distributions to shareholders and other factors will affect that number.
This is a highly simplified answer, however, and may not reflect the reality of the shareholder’s situation.
The part of the question where the potential client asks “if I put the money into another corporation” brings up a number of other tax planning issues. There is no “tax free exchange” of corporate stock. But there could be some ability to “write off” the investment in the new corporation against the income received from the sale of the old corporation, for instance if the new corp is a pass through entity and has purchased equipment eligible for first year expensing.
In summary, there are numerous “unknowns” that need to be explored.
As a starting point, I would suggest to ask for the paperwork documenting the sale and see how it’s structured. There could be any number of ways that the $850K was paid. Maybe part of it a loan repayment to shareholder, maybe a tax free split off (“divisive reorganization”), there are a lot of ways it could be done.
Let’s Have an Ongoing Discussion
No matter how you slice it, this tax professional is best off working to provide a truly professional viewpoint to the client, rather than just answering the question for free without all the facts in hand.
In an effort to be a good teammate to our Pronto Tax School Biz Verified Member as he builds his business owner clientele, I’m going to link to this blog post as my initial answer to this tax professional’s question.
He will then be able to absorb my thoughts and, I would think, may have some follow up questions.
We can engage in an ongoing discussion right from within the online corporate tax course–and other instructors and students can also jump in and add their two cents to this $850K question.
The early Beta Members of the new Business Tax Verified Training Program are the cream of the crop Pronto Tax School Members. These are people from all across the country who take their business seriously and know a LOT about taxes. Just having access to a community like this is a huge benefit when doing corporation tax work.
I know I would have loved to be able to ask questions like this when I was first starting out doing corporate tax preparation and consulting. I had no one to ask and I felt alone and confused.
Our online corporation tax training where you can ask questions to the community hopes to solve that problem by “crowdsourcing” answers from savvy tax professionals nationwide.
Pronto Tax School, Inc. does not provide tax advice. The information contained in these course materials is for educational purposes only and should not be used as a substitute for consultation with a professional tax advisor.