If you run your business as an S corporation and are ready to shut it down, you face federal income tax issues.

This article explains the tax basics for the corporation and its shareholder(s), like you, in two of the most common scenarios.

Scenario 1: Stock Sale

One way to shut down an S corporation is for you and the other shareholder(s), if any, to simply sell all your company stock and move on. The gain from selling S corporation stock is treated as a capital gain.

If you’ve owned the shares for more than one year, the lower long-term capital gain tax rates apply.

The current maximum federal rate for long-term capital gains is 20 percent, but that maximum rate hits only those with high income.1

If you’re a single filer in 2024, the 20 percent rate kicks in when your taxable income exceeds $518,900.

For a married joint-filing couple, the 20 percent rate kicks in when your taxable income exceeds $583,750.

For a head of household, the 20 percent rate kicks in when your taxable income exceeds $551,350.

If you are only a passive investor in the corporation, you may also owe the 3.8 percent net investment income tax (NIIT) on all or part of the gain from selling your shares. But if you actively participate in the S corporation’s business, your gain will be exempt from the NIIT.2

Finally, you may also owe state income tax on the gain from selling your shares.

Scenario 2: Asset Sale and Liquidation

Perhaps the most common way to shut down an S corporation is for the corporation to sell all of its assets, pay off all of its liabilities, and distribute the remaining cash to the shareholder(s) in complete ... Log in to view full article.