28 Nov Section 1045 Piecemeal Stock Sale
Performing piecemeal stock sales can be helpful in taking money out of the business and placing in more diversified assets. The Section 1045 piecemeal stock sale is like a standard cash or debt stock sale from an owner with an interesting twist. Section 1045 allows for the deferment of a taxable gain from a non-corporate shareholder. In the event of the sale of stock, if the sale of the business’ stock is immediately followed by the reinvestment of said stock in another new qualified small business within 60 days with no taxation whatsoever. The stock must be held in the newly-invested business for a minimum time of six months for the taxation deferment to be valid.
Any C-corp shareholder wishing to diversify may find this option useful, especially if he/she wishes to avoid taxes.
Remember the key definition here is “small business stock.” Which means the business stock being sold and the business stock being acquired must both qualify as a small business. Here are some other key considerations:
- The entity must be a C-corp
- The stock must have issued to the shareholder after the Revenue Reconciliation Act of 1993 (in other words, resales are not allowed)
- Gross assets of the business may not exceed $50 million–hence the “small business” definition
- The corporation must have been active and engaged in a qualified trade or business. In other words, the business has to be a real company. You can’t just put your money into some type of private shell entity to avoid taxation
This option is very similar to a 1031 tax exchange often performed by real estate investors who can avoid tax by reinvesting in other real estate properties. In the case of buying and selling businesses, cash flow may be better and returns are always higher when you can effectively avoid the hairy issue of paying more taxes to Uncle Sam.