Hi TaxGuyBill,
I am partnering with an existing business owner to acquire ownership through profit sharing contributions. The idea is to use profit sharing to purchase shares, up to and including 20%. The agreement is drafted for 2 years of automatic share purchases from the eligible profit sharing. My question is how can I use 100% of the profit sharing to purchase the shares pre-taxed, at least until all shares are purchase and the excess be taxed as income. Below are the brief details to the agreement.
Goal: 2 year plan to gain 20% ownership by the end of year 2. Profit sharing will be automatically rolled into purchasing up to 200,000 shares of a 1,000,000 share company at $1.30 per share.
Example: year 1 yields $130K in eligible profit sharing, to purchase 100,00 shares; 10%. Year 2 yields $65K in profit sharing and $65K in equity returns; 100% vested.
Year 1: Profit sharing will be automatically rolled into purchasing. Remaining share percentage (10%) will be the eligible profit sharing for year 2.
Year 2: Eligible profit sharing (10% per example) and equity returns from shares purchased in Y1 are automatically rolled into purchasing the remaining shares (10%) . Any excess returns are to be received and taxed as income.
Please tell me if there is a tax differed strategy to do this without the profit shares or equity returns being taxed before purchasing the shares. Otherwise, I will need to pay out of pocket for any remaining shares. As you can imagine, I would have to write a very big check if taxed before purchasing shares. Any and all advice is much appreciated.
