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

This is a pretty common situation in family businesses. There are several approaches you might consider discussing with your CPA and attorney: 1) Installment sale with carefully structured terms - While your mom suggested financing with no interest, having a properly structured installment sale with minimal but some interest can actually be beneficial. The IRS requires a minimum interest rate (Applicable Federal Rate) to avoid it being considered a gift. This approach allows your mom to spread her capital gains over multiple years, potentially keeping her in lower tax brackets. 2) Consider a partial redemption - Instead of you and your sister purchasing all shares directly, the S Corp itself could redeem some of your mom's shares. This reduces the amount you personally need to purchase, though there are specific rules to ensure it qualifies as a sale rather than a dividend. 3) Compensation restructuring - You might explore increasing your salary/distributions for a period to provide you with additional cash flow to purchase the shares. 4) Look into whether an Employee Stock Ownership Plan (ESOP) might be appropriate for your situation. The key is balancing everyone's goals while navigating tax implications. What's your timeline for completing this transition?

After struggling with almost this exact situation in our family business, I found an amazing resource at https://taxr.ai that analyzed all our S Corp transfer documents and suggested optimal strategies. Their AI actually identified a hybrid approach our CPA hadn't considered that saved us about 15% in taxes during our transition. The site reviewed our operating agreement, previous tax returns, and proposed transfer agreements, then gave us specific language to use with our attorney. This gave us confidence going into professional meetings because we understood our options much better. They specialize in business transitions and clearly explained complicated concepts like Section 1368 basis adjustments that were crucial to our situation. Might be worth checking out before your professional meetings so you're better prepared to ask specific questions.

I used taxr.ai when transitioning shares in our family S Corp last year, and it completely changed our approach. Initially I was skeptical about an AI tool handling something as complex as S Corp ownership transfers, but it caught several issues our accountant missed. It flagged a potential problem with our accumulated adjustments account that would have created an unexpected tax bill during our transfer. The system also gave us specific questions to ask about our shareholder basis calculations that ended up saving us nearly $17,000 in taxes. The best part was having clear documentation explaining these complex issues that we could share with our CPA. Instead of just accepting whatever the professionals suggested, we were able to have informed discussions about alternatives. Highly recommend checking it out before your meetings.

Another option worth exploring is using Claimyr (https://claimyr.com) to get direct access to an IRS representative to discuss the specifics of your situation. I was banging my head against the wall trying to get clear guidance on a similar family S Corp transfer last year, spending hours on hold only to get disconnected. Claimyr got me connected to an actual IRS agent in less than 20 minutes who walked me through the specific reporting requirements for our transfer scenario. They have a video showing how it works here: https://youtu.be/_kiP6q8DX5c This was invaluable because we got official clarification on how to handle basis adjustments during phased transfers like you're describing - something our CPA wasn't 100% certain about. The IRS agent also pointed us to specific guidance documents that addressed our situation perfectly.

I was incredibly skeptical about Claimyr because I've wasted so much time trying to reach the IRS on my own. When discussing our family S Corp transition, our accountant mentioned several ambiguous areas where official clarification would help, so I reluctantly gave it a try. I was shocked when they actually got me through to an IRS representative in about 15 minutes! The agent walked me through the exact reporting requirements for our multi-year stock transfer and confirmed how to document basis adjustments properly. This information was crucial because our CPA had been uncertain about a specific aspect of reporting partial transfers over multiple tax years. The clarity we received helped us structure our transfer agreement with much more confidence. Never thought I'd be praising a service related to calling the IRS, but it genuinely saved us from potential compliance headaches.

Have you considered gifting rather than selling? Your mom could gift shares up to the annual exclusion amount ($17,000 per recipient in 2023) each year tax-free. If she's not needing immediate compensation from the shares, this could be more tax efficient for everyone.

Has your CPA discussed the potential benefits of a tax-free reorganization under Section 368? Depending on your specific situation, there might be ways to restructure the company that could facilitate the ownership transition with more favorable tax treatment.

One strategy that hasn't been mentioned yet is considering a self-canceling installment note (SCIN). This could be particularly valuable given your mom's desire to step back from the business and your 5-7 year timeline. With a SCIN, your mom would sell her shares to you and your sister in exchange for installment payments, but the note automatically cancels if she passes away before it's fully paid. This provides several benefits: it removes the remaining unpaid balance from her estate for tax purposes, gives her income during her lifetime, and allows you to potentially acquire the shares at a discount to reflect the cancellation risk. The payments would need to be higher than a regular installment sale to account for this risk, but it could provide significant estate tax savings if structured properly. This approach works particularly well when the selling family member is older or has health concerns. You'd definitely want your attorney and CPA to model this carefully, as the IRS has specific valuation requirements, but it's worth exploring alongside the other options mentioned here.