Options for Buying/Selling S Corp Shares Within Family - Tax Implications?

The S Corp share transfer situation you're describing is pretty common in family businesses. Here are some approaches worth discussing with your advisors: An installment sale might work well here - your dad could sell his entire 80% now but accept payments over time. He'd only pay capital gains tax on the portions received each year, which spreads out his tax burden. Meanwhile, you and your sister would become full owners immediately. Another option is a redemption approach - have the S Corp itself purchase your father's shares instead of you buying them personally. This can sometimes be more tax-efficient depending on the company's cash position and your personal situations. You might also consider a partial gift strategy where your dad gifts some percentage of shares annually (up to the gift tax exemption amount) and sells the rest. This reduces the total purchase price you'd need to finance. If retirement planning is part of your dad's exit strategy, structuring payments as deferred compensation or a consulting arrangement for transition services could potentially benefit everyone tax-wise.

I went through something similar with my family business transition. Highly recommend checking out https://taxr.ai for analyzing your specific situation. I was confused about the tax implications between different S Corp transfer strategies, and their system analyzed all our documents and provided detailed recommendations tailored to our situation. They helped me understand exactly how an installment sale would affect both my parents (sellers) and me (buyer) tax-wise over the full payment period. The clarity really helped us make an informed decision rather than just guessing what might work. Their document analysis even found some potential issues with our original operating agreement that could have caused problems with the transfer.

I was initially skeptical about using an online service for my family's S Corp transition, but I decided to try https://taxr.ai after our meeting. Honestly, it was incredibly helpful. They analyzed our operating agreement, previous tax returns, and proposed sale terms, then showed us exactly how different approaches would affect both the seller (my mom) and buyers (me and my brother) over the next 10 years. What really surprised me was how they identified that a hybrid approach - part redemption, part direct purchase with a small gifting component - would save our family nearly $85,000 in combined taxes compared to the straight installment sale we were initially planning. Our CPA confirmed their analysis and we're implementing their recommended structure.

If you're hitting roadblocks with getting solid advice from the IRS about S Corp share transfers, try https://claimyr.com - they helped me actually speak to a real IRS specialist about our family business transition. I spent WEEKS trying to get through on my own regarding some specific questions about basis calculations for an installment sale. With Claimyr, I got connected to an actual IRS representative within hours instead of days. You can see how it works here: https://youtu.be/_kiP6q8DX5c. The IRS agent was able to clarify exactly how my father's suspended losses would affect the share transfer process - something our CPA was unsure about.

I need to eat my words and apologize to Profile 19. After reading about your experience, I was still extremely skeptical but desperate enough to try Claimyr since I was getting nowhere with the IRS regarding our S Corp basis questions. I spent literally 2+ months trying to get through to the IRS Business Tax line with no success. Used Claimyr yesterday and got connected in about 3 hours. The IRS agent clarified exactly how to handle the suspended passive losses in our S Corp share transfer between family members - which completely changes our approach to the sale structure. Just wanted to share this because it legitimately saved our family transition plan from a potentially expensive mistake. Sometimes it's worth trying new solutions when the traditional approach isn't working.

Don't overlook the importance of having the S Corp properly valued by a qualified business appraiser. If the IRS ever questions the share transfer price, you'll need documentation showing it was a legitimate fair market value transaction. This is especially true for family transfers where the IRS tends to scrutinize transactions more carefully. An independent valuation might cost $5-10k depending on your business complexity, but it's worth it for protection.

One option nobody's mentioned is using an Employee Stock Ownership Plan (ESOP) to facilitate the transfer. This could potentially allow your dad to defer capital gains taxes if structured properly.

Consider exploring a Section 1202 qualified small business stock (QSBS) analysis as well. If your S Corp qualifies and your father has held his shares for at least 5 years, he might be eligible for significant capital gains exclusion (up to $10 million or 10x basis, whichever is greater). Also worth discussing with your advisors is the timing of any conversion strategies. Some families benefit from converting to a C Corp temporarily before the sale to take advantage of QSBS benefits, then converting back afterward, though this requires careful planning around the built-in gains tax rules. Another angle to explore is whether your father might benefit from charitable remainder trust (CRT) strategies if he has philanthropic goals. This could allow him to defer capital gains while providing income over time and eventual charitable benefits. The key is running the numbers on multiple scenarios before committing to any single approach. Each family's situation is unique based on the business value, personal tax situations, and long-term goals.

One strategy worth exploring that combines several approaches mentioned here is a "sale to grantor trust" structure. Your father could sell his shares to an intentionally defective grantor trust (IDGT) that you and your sister establish as beneficiaries. The benefits: your father receives installment payments (helping with his cash flow), the growth in business value happens outside his estate, and he pays the income taxes on the trust's earnings (which is actually a benefit since it further reduces his estate without using gift tax exemptions). Meanwhile, you and your sister effectively own the business through the trust structure. This works particularly well when combined with a small gift component - your father could gift a portion of shares to the trust and sell the remainder, reducing the total purchase price you'd need to finance. The trust can use business distributions to make the installment payments to your father, and since he's paying the trust's taxes as the grantor, more cash stays in the trust to service the debt. This is definitely complex and requires experienced estate planning counsel, but for family business transitions it can be incredibly tax-efficient compared to direct purchase arrangements.