01
The challenge
The owner had agreed price and terms and would carry much of the price as a note. The paperwork described a sale of membership interests to a buyer who could not hold S corporation stock. Nobody had modelled how the seller would be taxed in an equity sale versus an asset sale, how much gain could be deferred under the installment method, or what interest the note had to carry.
02
Our approach
- Facts before advice. A signed engagement letter and a detailed questionnaire came first. No structure was recommended until the answers and documents were reviewed.
- Eligibility and termination. We showed both sides how a nonresident buyer would terminate the S election under §1362(d) and what that meant for the final Form 1120-S.
- Equity sale versus asset sale. We modelled the seller's gain both ways, including the §1060 price allocation reported on Form 8594 and §1245 depreciation recapture.
- Seller financing. The note was set at or above the applicable federal rate, gain was spread under §453, and recapture that §453(i) requires in the year of sale was planned for in cash.
- Closing checklist. Final S corporation return, Texas franchise tax final report, Form 8594 and the seller's Form 6252 reporting calendar.
03
Results delivered
- A written comparison of equity and asset sale structures, with after-tax proceeds for the seller under each.
- Note terms that meet IRS interest rules and protect the installment method.
- A year-of-sale cash plan for tax that cannot be deferred.
- A post-closing compliance calendar for the life of the note.
04
Frequently asked questions
A nonresident alien is not an eligible S corporation shareholder. If one acquires shares, the S election terminates on that date.
Often yes. The installment method under §453 spreads gain over the payments you receive, but depreciation recapture is generally taxed in the year of sale.
A stock sale usually produces capital gain for the seller, while an asset sale can create ordinary income from recapture. The right answer depends on the price allocation and what the buyer will accept.
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