Illustrative example: after-tax proceeds of a C-corporation funeral home, asset sale vs. stock sale
By Jason Taken, Business Advisor, HedgeStone Business Advisors · Last reviewed · 7 min read
In this illustrative composite, a C-corporation funeral home owner nets about $2.20 million from a $4 million asset sale but about $2.44 million from a $3.6 million stock sale, using assumed federal rates. The asset sale is taxed twice, inside the corporation and again on liquidation. Any stock price above about $3.29 million beats the asset offer.
Key takeaways
- In the asset sale, total federal tax was about $1.41 million, roughly 34% of the headline, because the corporation paid 21% on its gain and the owner paid 23.8% on the liquidating distribution.
- A C corporation pays the same 21% on every dollar of gain, so the building's depreciation and the goodwill are taxed alike inside the company.
- The buyer offered $400,000 less for the stock, but the owner would still come out about $240,000 ahead, and could accept as little as about $3.29 million.
- A supportable personal goodwill sale of $860,000 lifted the asset-sale result to about $2.34 million, narrowing but not closing the gap with the stock sale.
- Converting to an S corporation just before a sale does not avoid the corporate layer: built-in gains remain taxable for five years after the election.
The corporation was formed in the 1970s, when incorporating a family funeral home as a C corporation was common advice, and it still owns the building. That one fact shapes everything below. This is an illustrative composite, not a real client deal; the owner, firm, offers, and numbers are invented to show the arithmetic. Tax figures use assumed federal rates only, with no state tax. Talk to your CPA before relying on any of it.
The owner, 67, holds 100% of the stock, with a tax basis of $52,000 from the original investment. Two buyers are interested: one will buy only assets, at $4,000,000 plus $125,000 for a personal non-compete; the other will buy the stock at $3,600,000, plus the same non-compete.
How is the $4 million asset price allocated?
Across the Form 8594 classes, with most of the value landing in goodwill. The allocation decides how much of the gain each asset carries, though for a C corporation the rate is the same on all of it.
The Form 8594 instructions sort a business’s assets into seven classes and require both buyer and seller to file when goodwill could attach. They also treat a covenant not to compete with the seller’s owners as part of the consideration to report.
| Class | Assets | Price allocated | Corporation’s tax basis | Gain |
|---|---|---|---|---|
| I–III | Cash and receivables | Kept by the corporation; left out of this math | n/a | n/a |
| IV | Caskets, urns, vaults (inventory) | $68,000 | $68,000 | $0 |
| V | Land | $215,000 | $42,000 | $173,000 |
| V | Building | $880,000 | $255,000 | $625,000 |
| V | Vehicles and equipment | $296,000 | $61,000 | $235,000 |
| VI | Non-compete (paid to the owner personally) | $125,000 | n/a | Owner’s ordinary income |
| VII | Goodwill and going concern | $2,541,000 | $0 | $2,541,000 |
| Total | $4,125,000 | $3,574,000 corporate gain |
What does the asset sale leave the owner?
About $2.20 million, after two layers of tax. The corporation pays first, then the owner pays again when the corporation distributes what is left.
Worked example: asset sale, then liquidation
Inside the corporation
- Gain $3,574,000, less $172,000 of sale costs = $3,402,000 × 21% = $714,420 corporate tax
- Cash left: $4,000,000 − $714,420 − $172,000 costs − $342,000 mortgage = $2,771,580
At the owner’s level
- Liquidating distribution $2,771,580, less $52,000 stock basis = $2,719,580 × 23.8% = $647,260
- Net from the corporation: $2,771,580 − $647,260 = $2,124,320
- Non-compete: $125,000 × (1 − 37%) = $78,750
Total to the owner: $2,203,070. Total federal tax: $714,420 + $647,260 + $46,250 = $1,407,930, about 34% of the $4,125,000 headline.
The second layer is unavoidable. Under 26 U.S.C. §336, a liquidating corporation recognizes gain on distributed property as if it sold it at fair market value, and the shareholder is then taxed on the distribution. The 23.8% is an assumed 20% long-term rate plus the 3.8% net investment income tax, which the IRS levies on the lesser of net investment income, capital gains included, or modified adjusted gross income above $250,000 for joint filers. Notice what did not happen: the building’s $625,000 gain got no special rate. A C corporation pays 21% on everything.
What does the stock sale leave the owner?
About $2.44 million, even though the price is $400,000 lower. There is only one layer of tax, at the owner’s capital gain rate.
| Line | Amount |
|---|---|
| Stock price, cash-free and debt-free | $3,600,000 |
| Mortgage paid off from the price | −$342,000 |
| Sale costs | −$172,000 |
| Gain: $3,258,000 − $172,000 − $52,000 basis = $3,034,000 × 23.8% | −$722,092 |
| Net from the stock | $2,363,908 |
| Non-compete after 37% tax | +$78,750 |
| Total to the owner | $2,442,658 |
Why did the buyer discount the stock? Two reasons. It inherits the corporation’s whole history, including every preneed contract ever sold, so it will want each one tested on The Preneed Reconciliation Ladder and backed by an escrow. And it loses the step-up. In an asset purchase, the buyer could amortize the $2,541,000 of goodwill over 15 years under 26 U.S.C. §197, about $169,400 of deductions a year. In a stock purchase it keeps the corporation’s old, low basis. Our guide to buyer tax benefits from depreciation covers that side.
The owner’s side of that bargain is paperwork and patience. The stock buyer asked for representations covering every preneed contract and license, a seller indemnity that survives for several years, and a portion of the price held back to secure it. Those terms are the cost of the stock sale’s lower tax, and they belong in the comparison alongside the numbers.
How low could the stock price go and still win?
To about $3,285,580. At that price, the stock sale nets exactly what the asset sale does.
Worked example: break-even stock price
Set stock net equal to the asset sale’s $2,124,320 (the non-compete is the same either way):
(P − $342,000 − $172,000) − 23.8% × (P − $342,000 − $172,000 − $52,000) = $2,124,320
0.762 × (P − $514,000) + (0.238 × $52,000) = $2,124,320, so P − $514,000 = ($2,124,320 − $12,376) ÷ 0.762 = $2,771,580
P ≈ $3,285,580, about $714,000 below the asset price.
That gap is the corporate tax the owner avoids. In practice, it gives the seller room to accept a stock discount and still offer the buyer indemnities for older liabilities.
Does personal goodwill change the answer?
It narrows the gap. If $860,000 of the goodwill belongs to the owner personally and is sold directly, that part skips the corporate tax.
The asset buyer pays the corporation $3,140,000 and the owner $860,000. Corporate tax falls to ($3,402,000 − $860,000) × 21% = $533,820. The corporation distributes $3,140,000 − $533,820 − $172,000 − $342,000 = $2,092,180, taxed at 23.8% after basis: $485,563. The owner’s personal goodwill nets $860,000 × 76.2% = $655,320. Total, with the non-compete: $2,340,687, still about $102,000 short of the stock sale.
Personal goodwill is a fact question. A 2015 Tax Adviser analysis of the Tax Court cases notes that it generally exists only when the business has no right, “by contract or otherwise,” to the owner’s future services. An old employment agreement or non-compete with the corporation can defeat it.
Can the owner elect S status first?
Not as a quick fix. Under 26 U.S.C. §1374, an S corporation that was formerly a C corporation pays corporate-level tax on built-in gains recognized during the five years after the election. A sale inside that window keeps most of the corporate layer. It is a planning step for owners five or more years from a sale, covered in our guide to pre-sale tax planning.
What does this math leave out?
Several things that can move the answer by tens of thousands of dollars, which is why the comparison is a starting point for your advisors, not a decision.
- State taxes. Most states tax corporate income and individual capital gains, at rates that vary widely. A state corporate tax adds to the asset sale’s first layer, so it usually widens the gap in favor of stock.
- Cash and receivables. The corporation keeps them in the asset sale and distributes them in liquidation, where they are taxed again. In a stock sale they are typically swept out or priced through a working capital adjustment.
- Timing. A liquidation can stretch into the following tax year, and any part of the price held in escrow or paid later changes when tax is due.
- Indemnities. A stock buyer will want broader seller indemnities and a larger escrow, because it inherits the corporation’s past. If $300,000 sat in a two-year escrow and some of it paid claims, the stock sale’s lead would shrink by that amount.
- The non-compete’s rate. It is ordinary income to the owner in both structures, so a buyer who shifts value into it raises the owner’s tax.
Questions to bring to your CPA
- What is my stock basis, and can you document it?
- What would state tax add to each structure?
- Is any of the goodwill personal, and what would an appraiser need to support it?
- How should the non-compete be priced and allocated?
- If I do nothing for five years, would an S election change the answer?
What is the lesson from this example?
For a C-corporation funeral home, compare offers after tax, never on headline price. Here the lower stock offer was worth about $240,000 more, and the owner knew before negotiating that any stock price above about $3.29 million would win.
Run your own inputs in the seller net proceeds calculator below, then have your CPA and attorney model state taxes, the allocation, and personal goodwill. Our comparison of asset sales and stock sales, our guide to taxes on selling a funeral home, and the valuation, finance, and tax hub cover the rules behind each line.
Seller net proceeds estimator
Walks from headline price to cash in hand. Tax inputs are a rough blended placeholder; your CPA should model the real allocation.
Educational estimate only. Not an appraisal, valuation opinion, or loan approval.
Frequently asked questions
Why do buyers resist buying the stock of a funeral home corporation?
They inherit everything the corporation ever did, including preneed contracts sold decades ago, past regulatory issues, and employment claims. They also lose the step-up that lets them deduct goodwill and depreciate assets at the price they paid. Buyers who agree to stock usually discount the price and ask for stronger indemnities and escrows.
What is the net investment income tax, and does it apply here?
It is a 3.8% federal tax on investment income, including capital gains, for individuals above income thresholds such as $250,000 for married couples filing jointly. Gain on selling C-corporation stock and on a liquidating distribution generally counts. This example applies it at the shareholder level in both structures.
Can a C-corporation owner sell personal goodwill to avoid double tax?
Sometimes. It works only when the goodwill belongs to the owner personally, which generally means the corporation has no employment agreement or non-compete giving it rights to the owner's future services. It needs a qualified appraisal and its own purchase agreement, and the IRS may challenge weak claims.
Do I need Form 8594 in a stock sale?
Not for an ordinary purchase of shares, because the buyer acquires stock rather than a group of business assets. Form 8594 applies when assets making up a trade or business change hands and goodwill could attach. Your CPA will confirm whether any part of your transaction, such as a separate goodwill sale, needs one.
Sources cited
- Instructions for Form 8594, Asset Acquisition Statement — Internal Revenue Service
- Net Investment Income Tax — Internal Revenue Service
- 26 U.S. Code §336, Gain or loss recognized on property distributed in complete liquidation — Legal Information Institute, Cornell Law School
- 26 U.S. Code §1374, Tax imposed on certain built-in gains — Legal Information Institute, Cornell Law School
- 26 U.S. Code §197, Amortization of goodwill and certain other intangibles — Legal Information Institute, Cornell Law School
- Tax Clinic: personal goodwill (April 2015) — The Tax Adviser (AICPA)