How can we transfer his stock to me without paying taxes or large fees. I run the company and take a weekly distribution. I give him what Im able to weekly, usually 300 to 400. The problem is he pays taxes on half the profit ,i.e my draws, without getting very much. For example last year we split the taxes on 65,000 and he only drew 16000 simply because he's half owner. He is retired. Whats the best way to go about it.
You need to hire a tax attorney to transfer the stock in a least costly way, but it may be still problematic. Read this article written by a CPA.
Please be advised that information given by the attorney is used for general purpose only and should not be construed to take it as attorney client relationship. Answers given by the attorney should not be treated as advice. It is always wise to retain counsel as information provided in this section is educational only, which is based on incomplete and preliminary facts provided by the questioner.
First off, You should be paying yourself salary; you cannot take all your compensation as distributions or you will be charged with payroll taxes if you don't correct this asap ; This is an audit flag fyi.
An option is to convert the S corp to a C corp, then the C-corp pays the corporate income taxes, and you take your main compensation as a salary, and he can take a smaller salary too; if you pay the dividends also to both of you this is what they call double taxation so just keep your compensation as salary--which of course is a deduction to the corporate income and lowers your corporate income tax bill; AND corporate income tax is only 15% on first $50,000 net income; your personal tax rate is 39.6%. He would still own half which he can transfer to a living trust to be passed on to you and you could receive it at the current market value.
Now on transferring S corp stock, How I handle this is through a simple stock purchase agreement; you would pay him for his one half of the net value with perhaps a discount. You can use what is on your balance sheet for net worth or book value of the assets for a lower number, or some other reasonable valuation. You should talk to your CPA about what the capital gains tax to him may be.
The foregoing is for informational purposes only and may not be relied on as attorney-client advice.
I agree with the comments so far. You need to both sit down with an estate planning-tax attorney. There are potential tax landmines there that you may be able to avoid with correct and timely planning. Good luck.
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