Interactive Guide to C Corp & Shareholder Transactions
Explore the tax implications of key entity-owner transactions, from formation to liquidation.
1. Formation: Creating Value (IRC Sec. 351)
When forming a C Corporation, shareholders can often contribute property in exchange for stock without it being a taxable event. This section explores the key rules and calculations that govern this process, helping you understand how initial value is established from a tax perspective.
Interactive Basis Calculator
Use this tool to determine your stock basis and any recognized gain when contributing property to a corporation. This is crucial for future tax calculations.
Calculation Results
Recognized Gain:
$0
Gain is the lesser of realized gain or boot received. Also, gain is recognized if liabilities exceed property basis.
Shareholder's Stock Basis:
$80,000
Formula: Prop. Basis + Gain - Liabilities - Boot
Corporation's Basis in Property:
$140,000
Formula: Shareholder's Prop. Basis + Gain Recognized by Shareholder
2. Distributions: Receiving Value
Once a corporation is operational and profitable, it can distribute value to its shareholders. However, the tax treatment of these distributions depends on the corporation's "Earnings & Profits" (E&P). This interactive chart demonstrates how distributions are sourced and taxed.
Interactive Distribution Source Chart
Adjust Total Distribution
Change the distribution amount to see how it impacts the tax treatment. Note the fixed E&P and shareholder basis for this example.
Example Data:
Current E&P: $15,000
Accumulated E&P: $10,000
Shareholder Stock Basis: $20,000
3. Major Events: Redemptions, Liquidations & Reorganizations
Corporations undergo significant changes throughout their existence. Events like buying back stock (redemption), closing down (liquidation), or merging (reorganization) have distinct and critical tax consequences for shareholders. This table provides a clear comparison of these transformative events.
| Event | Shareholder Treatment | Corporation Treatment | Key Characteristic |
|---|---|---|---|
| Stock Redemption | Dividend income, unless "disproportional," then it's a capital gain/loss. | Recognizes gain (but not loss) on distributed appreciated property. | Corporation buys back stock from some or all shareholders; business continues. |
| Corporation Liquidation | Capital gain or loss (Assets Received vs. Stock Basis). | Taxable event. Recognizes gain or loss as if assets were sold at FMV. | Business completely ceases. Often results in "double taxation." |
| Tax-Free Reorganization | Generally non-taxable (no gain/loss). Basis carries over. | Generally non-taxable. Tax attributes (like NOLs) carry over. | Continuation of business in a modified form (e.g., merger, acquisition). |
4. Special Opportunities: Maximizing Value
The tax code provides powerful incentives for investing in certain types of small businesses. Understanding these rules for Section 1244 Stock and Qualified Small Business Stock (QSBS) can lead to significant tax savings by allowing for favorable loss treatment or complete gain exclusion.
Section 1244 Stock
Benefit: Treat loss as an Ordinary Loss, not a Capital Loss.
This is a major advantage, as ordinary losses can directly offset regular income (like wages), whereas capital losses are limited.
Qualifications:
- Stock from a U.S. small business corporation.
- First $1 million of capital stock.
- Issued for money or property (not services).
- Original stockholder.
Max Ordinary Loss Deduction:
$100,000 (Married Filing Jointly) / $50,000 (Others)
Qualified Small Business Stock (QSBS)
Benefit: Exclude up to 100% of capital gain from tax.
An incredibly powerful incentive for long-term investors in qualifying small businesses.
Qualifications:
- Hold stock for more than 5 years.
- Acquired at original issuance from a C Corp.
- Corp. assets less than $50 million at issuance.
Max Gain Exclusion (per shareholder):
Greater of $10 million OR 10x the stock's basis.