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ARTICLE · 27 JANUARY 2016

What Founders Should Know About Tax Planning For An Exit

Fox Rothschild LLP
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Founders who plan to sell their company invariably ask their tax advisers about the possibility of reducing the tax cost of the sale. When they do, founders invariably learn that a lot of factors affect the amount of tax they must pay, and when they must pay it.

United StatesTax
Stanley Barsky
Stanley Barsky
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Originally published by Law360

Founders who plan to sell their company invariably ask their tax advisers about the possibility of reducing the tax cost of the sale. When they do, founders invariably learn that a lot of factors affect the amount of tax they must pay, and when they must pay it.

Federal Income Tax

A founder is generally required to include in income the consideration received for the interests in the company, reduced by the founder's tax basis in the interests, unless the sale qualifies for tax-free treatment. Consideration generally consists of cash and property paid to the founder, and any liabilities from which the founder is relieved.

The highest marginal federal tax rate on ordinary income (OI) is 39.6 percent. By contrast, the highest marginal federal income tax on long-term capital gain (LTCG) is 20 percent (subject to the additional 3.8 percent net investment income tax, discussed below). To qualify for the LTCG rate, the founder must

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