Posts Tagged ‘capital gain’

Tax Planning Strategy: Capital Gains Harvesting

This post is currently being updated for corrections, watch for the re-post.

Opportunities and Pitfalls in Organizing a New Business

Recently we received a call from an attorney incorporating a start up. 

His question was simple enough:  “I need to know how to quantify beginning capital for this corporation I formed on December 31, 2009; there is cash and IP (Intellectual Property) involved.”

Upon learning the facts, we determined the people that formed this corporation were about to step into a taxable event of over $3 million!  We were glad we got the call before it was too late!

The lesson to be learned here is that it is always a good idea to get expert advice when forming a new company.  It can be very complicated!  Believe it or not one of the first things to consider is the ultimate exit strategy.  Frequently exit strategy drives the decision regarding both the form and tax options of the new entity in formation.

For small businesses engaged in a “trade or business” there is an exit strategy benefit worth planning for: 

Shareholders of Corporations formed after 2/17/09 and before 1/1/2011 get a 75% exclusion from capital gains up to $10 million.  Previously this was 50% and at that rate it saved a ton of tax!  The corporation must be a C corp. from inception.  If you want to use this strategy but still pass the initial losses to the founders, start with an LLC and form the corporation when you get traction and investors.  If you hold the stock for 5 years before sale, you get the exclusion.  There are details and  limitations that are beyond this discussion.

When forming an entity with sweat equity and money, “sweaters“  beware !

If the money partner puts in property (and/or money) of $1 million and the “sweaters” put in labor for 50% equity, they realize taxable earned income of $1 million upon receipt of the stock.   Usually the money partners want “know how” or other  I.P.  If this situation fits, turn your “sweat” into “property”  before you receive stock.  You could save a fortune!   Written business plans, patents, laptops….all property!  Work for your equity……. Taxable! 

If the money partner puts in $1 million for 50% and the “sweaters” put in labor for 50%, they realize income of $1million upon receipt of the stock.  This can be devastating to starving start ups.

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