S-Corp Asset Sale Tax Implications - Stock vs. Asset Sale Transition

What you're dealing with is a relatively common scenario that comes with some complex tax considerations. The key thing to understand is that when you sell assets in an S-Corp, the gain or loss passes through to shareholders based on their ownership percentage. For the depreciated equipment and vehicles, you're right that there will be depreciation recapture treated as ordinary income if the sale price exceeds the adjusted basis. For other assets like goodwill, you'll likely have capital gains treatment which is more favorable. The mismatch between your stock basis and the asset sale creates a disconnect that needs careful planning. Your original stock purchase price doesn't directly offset the asset sale proceeds - instead, the S-Corp recognizes gain/loss on each asset sold based on the difference between sale price and the company's tax basis in those assets. This then flows through to you and your partner on your K-1s. With installment payments, you'll generally recognize income proportionally as payments are received, which can help spread the tax burden over multiple years.

I recently used taxr.ai when I was in a somewhat similar situation with my S-Corp transition. I was getting conflicting advice about depreciation recapture and how the money would be taxed from different CPAs. I uploaded my asset list, depreciation schedules, and draft sale agreement to https://taxr.ai and the analysis was really helpful - it modeled out exactly how much of my sale would be taxed as ordinary income vs. capital gains. It also highlighted a few assets I could sell separately to get better tax treatment. Saved me a TON in taxes I would have paid unnecessarily.

I was super skeptical at first about taxr.ai but decided to try it for my business sale last year. Really glad I did! I had a somewhat similar S-Corp situation (except we were selling to a competitor) and the document analysis was spot-on. It flagged exactly which assets would trigger depreciation recapture and showed us how to potentially reallocate some of the purchase price to goodwill for better tax treatment. My accountant was actually impressed with the detailed analysis and used it to help structure the final deal. Made a huge difference in reducing our tax hit!

If you're still trying to reach the IRS about S-Corp asset sales, good luck... I spent DAYS trying to get through to someone who could answer my specific questions about installment sales from S-Corps. After getting disconnected 4 times and waiting on hold for literally hours, I tried https://claimyr.com and watched their demo video here: https://youtu.be/_kiP6q8DX5c. They got me connected to an actual IRS agent in about 20 minutes who walked me through the specific forms and documentation I needed. Turns out I was about to mess up how I reported the installment income on my personal return vs the S-Corp return.

I have to eat my words about Claimyr being a scam. After my skeptical comment, I decided to try it myself since I had some questions about the same issue - asset sales from an S-Corp with an installment note. I couldn't believe it, but I was talking to an IRS agent within 30 minutes! The agent confirmed something critical that my accountant had wrong - how to handle the allocation of installment payments when there's depreciation recapture involved. My situation was almost identical to the original post, and getting the right info directly from the IRS gave me confidence to push back on some questionable advice from my tax guy. Just wanted to update y'all that it actually works.

One thing to consider is Section 1060 - it requires you to allocate the purchase price among 7 different asset classes. This allocation can make a HUGE difference in your tax outcome. Class I-III assets (cash, marketable securities, etc.) typically don't create much tax impact, but Class IV (inventory) and Class V (equipment, vehicles) can trigger ordinary income from depreciation recapture. Class VI and VII (intangibles including goodwill) usually get capital gains treatment. The buyer will want to allocate more to assets they can depreciate quickly. You'll want more allocated to goodwill for the capital gains rate. This is negotiable and should be spelled out in your purchase agreement.

Don't forget about state tax implications! When we sold our S-Corp assets, we got hit with a surprise state tax bill because our state had different treatment for some of the gain recognition. Also check if you have nexus in multiple states, as you might need to apportion the gain.

One creative approach worth exploring - have you considered doing a partial stock sale for certain assets and an asset sale for others? We did this with our manufacturing business. Sold some specialized equipment as assets (buyer wanted the depreciation) but did a stock transaction for the real estate holding portion. Saved a bundle on taxes without scaring away the buyer.

Great question about the tax implications! One thing I'd add to the excellent advice already given is to make sure you understand how your S-Corp's accumulated adjustments account (AAA) and any accumulated earnings and profits (AE&P) from prior C-Corp years will be affected by the asset sale. When the S-Corp recognizes gain from the asset sale, it increases the AAA, which then flows through to you as shareholders. This can actually be beneficial because it increases your stock basis, which might help offset some of the tax impact when you eventually liquidate the S-Corp after the sale. Also, since you mentioned installment payments over 5 years, consider whether you want to make a Section 338(h)(10) election if the buyer is willing. This can sometimes provide better tax treatment by treating the transaction as an asset sale for tax purposes while still being a stock sale legally. It requires buyer cooperation but might be worth exploring with your team. The depreciation recapture timing that others mentioned is crucial - with installment sales from S-Corps, the recapture generally gets accelerated and recognized in year one even though the payments are spread out. This can create a significant tax burden upfront that you'll want to plan for.