Best Methods for Buying/Selling S Corp Shares Between Family Members

Thanks for these suggestions! For the installment sale option, wouldn't we still be using post-tax dollars to make those payments? And regarding the gift exclusion strategy - would that create any issues with step-up basis later on?

You're right about using post-tax dollars for the installment payments - that's unavoidable when purchasing shares personally. However, timing the payments to align with your personal tax situation can help minimize the impact. With the gift exclusion strategy, the recipient (you) would take your mother's basis in the gifted shares rather than getting a step-up. This means you'd potentially face larger capital gains taxes if you eventually sell the business. However, this might be offset by the reduced current purchase price. It's a trade-off that depends on your long-term plans for the business.

Did it actually give you specific actionable strategies or just general advice? I've tried other tools that just spit out generic recommendations that any blog post could tell you.

I'm curious about this too. How does it handle the analysis of profits that would be used for purchasing shares? Our S Corp has substantial pass-through income that would be taxed before we could use it for buying shares from our retiring partner.

It provided very specific, actionable strategies based on our documents. For example, it recommended a specific vesting schedule for our share transfer that aligned with our company's seasonal cash flow patterns. It wasn't just generic advice - it was tailored to our numbers and structure. For pass-through income concerns, it analyzed our historical distributions and tax returns to suggest an optimal payment structure that minimized the tax impact. It even flagged some potential issues with our operating agreement language that could have caused problems with the IRS down the road.

Wait, there's a service that actually gets you through to the IRS? How does that even work? I thought it was literally impossible to talk to a human there these days.

This sounds like BS honestly. The IRS isn't going to give you tax planning advice - they'll just tell you what the rules are. And why would you trust what some random phone rep says over a qualified CPA who specializes in this stuff?

The service uses technology to navigate the IRS phone system and secure your place in line - then calls you when an agent is about to be connected. It's completely legitimate and saves you from having to redial hundreds of times or wait for hours. You're right that the IRS won't give specific tax planning advice, but what they can do is clarify how certain transactions will be treated under current tax law. In my case, I needed to understand specific reporting requirements for installment sales between family members in an S Corp context, and getting those details directly from the source was invaluable for our planning.

That's an interesting approach I hadn't considered. Do you know if there were any issues with accumulated earnings tax or other penalties with this method? And were there any requirements about how the redemption needed to be structured to avoid having it treated as a dividend?

We had to be careful about the accumulated earnings tax, but our CPA helped structure it properly to avoid issues. Having a clear business purpose for the redemption (facilitating ownership transition) helped justify the retained earnings. For the redemption structure, the key was ensuring it qualified as a "substantially disproportionate redemption" under Section 302(b)(2) to receive capital gains treatment. This meant my father's ownership percentage after the redemption had to be less than 80% of his percentage before redemption, and his voting interest had to drop below 50%. Our CPA documented everything meticulously to support this treatment.

We looked into an ESOP for our S Corp with 15 employees but found the setup and administration costs were too high for our size. The minimum practical size is typically 20+ employees with stable cash flow. Otherwise, the setup costs (typically $50k+) and ongoing administration requirements don't make financial sense.

Thanks for that insight. We have about 18 employees so we're probably right on the edge. Do you know if there are any less expensive alternatives that accomplish something similar?

You might consider a phantom stock plan or stock appreciation rights (SARs) as alternatives. These give employees the economic benefit of ownership without actual share transfers, which can be much simpler for an S Corp since you avoid the 100-shareholder limit and other restrictions. Another option is a management buyout (MBO) where key employees purchase shares over time, similar to what the original poster is considering with family members. This can be structured with seller financing to make it more affordable for the employees. For your size company, these alternatives typically have much lower setup costs and ongoing compliance requirements compared to an ESOP while still providing employee incentives and an exit path for the majority owner.