Tax Implications

There are several tax implications to be aware of when shutting down a C corporation.

Complete liquidation of a C corporation is when it ceases to be a going concern.  It winds up its affairs, pays its debts, and distributes remaining assets to shareholder(s). The corporation redeems all its stock, and during the redemption, there can be one or more distributions pursuant to a plan.

While shutting down a C corporation having a written plan is advisable. It establishes a specific start date for the liquidation process. This helps differentiate between regular dividends and liquidating distributions.

There are three ways your corporation can achieve liquidation:

1. Distribute all of the corporation’s assets to the shareholder(s).
2. Sell all its assets, and distribute the proceeds.
3. Sell some assets, and distribute the resulting sales proceeds and unsold assets.

The Bottom Line

The bottom-line federal income tax results for all these options are similar for the corporation and the shareholder(s).

If your corporation distributes property other than cash during liquidation, it must recognize taxable gain or loss as if the distributed property had been sold for its fair market value (FMV).

As a shareholder, you treat the liquidating corporate distribution as payment in exchange for your stock. You recognize taxable capital gain or loss equal to the difference between the FMV of the assets received.

The complete liquidation of a C corporation with appreciated assets often results in double taxation. The first is at corporate level and again at the shareholder level. Timing could be critical depending on your situation and future changes in tax rates.

As of 2023, the maximum individual federal income tax rate on long-term gains from a corporate liquidation is 20 percent, or 23.8 percent if the 3.8 percent net investment income tax applies.

Once you decide on a complete corporate liquidation, the Board of Directors should adopt a plan and file Form 966 (Corporate Dissolution or Liquidation) with the IRS within 30 days of adopting the liquidation plan. The corporation should then file its final tax returns.

The Sterling Standard

Sterling Tax and Accounting is here to help your business with tax planning!  Our comprehensive approach to tax planning helps reduce your overall tax liability.

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