A friend in his 80s has an old single member c corp from the 80s that holds stocks. He said he doesn’t take any money out and plans to pass it through his estate to get a step up in basis to avoid the double taxation and his estate will only pay the corp tax rate. I suggested that he talk to a CPA but he is confident that the account will not pay any capital gains or income taxes if it goes through his estate. Does that sound correct? I googled it and come not find a definitive answer.
Passing a c corp through an estate to avoid 1 level of taxes.
byu/onehighlander intax
Posted by onehighlander
5 Comments
The value of his stock in the C Corp will be stepped up, but the corporation will still pay capital gain tax when it sells the stock holdings.
People sure do some weird stuff to try to save taxes. Seems to me that this neat little trick could actually increase the taxes paid.
I think what’s going to happen is when he dissolves C corp, the gain on the stock will trigger C corp income tax. E.g., a $100K of gain will trigger $21K of taxes inside the C corp.
I think when he distributes the leftover $79K, that’ll be a qualified dividend and also taxed on the 1040. (Basically like LT capital gains.)
At that point, the corp will be worthless because it’s asset-less. So whatever the valuation is for the Section 1014 adjustment (the step-up) will create a capital loss that’ll be carried forward.
This all works quite a bit better in a partnership. Sort of works better in an S corporation. But it’s a mistake to hold appreciating assets inside a corporation.
Idea: If he could sell the stocks, book the gain, pay the taxes in the C corp and then slowly drain the taxed profits (aka “earnings and profits”) over a few years, he might be able to pay the 0% qualified dividends tax rate?
Speak to an expert if you want expert results.
This has long been a case of what NOT to do. The corporation will pay a 21% capital gain tax on stock sales. But you get a step up on basis in the stock, completely wasting a $50,000 zero percent capital gain bracket.
It’s too late to fix it. If you liquidate, the corporation pays tax on the gains. And you get double taxed over $50,000.
But at least you get your big surprise early.