Tax Re: Sell of a business

[flpanhandle]

I'm posting this here hoping for some input. The Other Topics forum wasn't very responsive. How this works out will have a bearing on my FIRE. Thanks!

In another post http://early-retirement.org/forums/index.php?topic=13815.0 I inquired if anyone has ever sold a business.

My new question is, what are the tax consequences of doing so. From what I can read capital gains will apply to some of the sale. If the business sells for $135000 after broker commisions, how are taxes figured? Assetts of aprrox. $40000 that are totally depreciated, inventory of approx. $15000 that is paid for, and the remainder I guess being goodwill of $80000. This is an ongoing retail business.

Any input would be appreciated. I know I'll need a tax advisor, but in the mean time I am wondering. The IRS site was totally confusing.

Thanks.

 

[CybrMike]

How long have you owned the business. Things can get complicated quickly. You should just ask an accountant to look at it. Worth the money in my experience.

 

[flpanhandle]

Owned business since 1995. I will ask an accoutant but wanted to bounce it around here first.

 

[nwsteve]

As already noted, not a simple questions and advise of appropriate "qualified" resources worth the bucks. Just be sure they actually have experience with company sales
Two basic types--asset sales and going-concern sales.
With asset sales, you will pay tax on difference between price of asset and net book value. Depending on the asset and depreciation method used,you will also have to "recapture" all or some of prior year's depreciation. Trick is to allocate sale price in your sales agreement to minimize tax hit--role of your accountant.
Going-concern sale typically buys an enterprise. If value exceeds book, you are selling good will which at the simplest level is the difference between sales value and net book. For example, you sell a company with assets of 500K and receive 1 million in sales proceeds. You sold 500k of goodwill. Usually better to have this value transfer to you in the way of a non-revocable consulting contract. May need lawyer to properly structure (Martha help please)
As you should be seeing, there are no cut and dry answers. Nature of business, how sale is structured, including debt makes a big difference in what your final bottomline looks like
Good Luck
nwsteve

 

[Zathras]

It also depends on how you sell it.
For example, sell it via an ESOP to the employees. The proceeds, if used to buy stocks, are tax deffered.
No matter how you do it, as others have suggested, get a really good lawyer and accountant as it can be a very complicated issue.

 

[TromboneAl]

When I sold mine, the lawyer was careful to write the contract so that the money I got would be taxed as capital gains. IIRC he made it clear I was selling the intellectual property that I had created.

 

[Martha]

In your other thread I gave you a link to the IRS publication that talks about how the different assets are treated. It is pretty muddy at times. Here is a link that doesn't give as much info, but is in plain English: http://www.toolkit.cch.com/Text/P11_2452.asp

I would stay away from having a noncompete or consulting agreement, which would be treated as ordinary income. In contrast, good will is a capital asset and you would get capital gains treatment. Buyers would much rather have part of the price allocated to a consulting agreement/noncompete than good will, so there is that tension in negotiations.

Your depreciated equipment is going to be subject to recapture of depreciation so you end up paying a higher tax on the equipment. Sellers generally try to keep the value down on depreciated assets. Buyers tend to want the value higher on depreciable assets. Inventory you want valued at cost so there would be no tax consequence.

This is only very general information so dont rely on it.

 

[flpanhandle]

Thanks everyone. This gives me some idea of what to expect.
I appreciate it.
Thanks.

 

[boathole]

When I sold my business, I was able to take the gain over several years (at least 2). This was in 1997, so it was before the Bush tax cuts and it may no longer be available.

Be sure to check on that angle as it saved me tax on having a lower maximum income for the year I sold it.

Ray

 

[nwsteve]

I would stay away from having a noncompete or consulting agreement, which would be treated as ordinary income. In contrast, good will is a capital asset and you would get capital gains treatment. Buyers would much rather have part of the price allocated to a consulting agreement/noncompete than good will, so there is that tension in negotiations.

This is only very general information so dont rely on it.

Martha
As always right on target. I suggested the consulting agreement as a way to get a greater value from the business. For the reaon you mentioned, if a buyer has to amortize the goodwill and the number is large, it impacts the cash flow economics. On the other hand, if the seller does not have other income and can structure agreement to provide income that can be shoved into a SE 401k, a chunk of it ends of tax free to the seller and the buyer stills gets his deduction. All in all, it still comes down to the specifics of buyer and seller view of value and the best way to minimize risk and tax tradeoffs---but isn't why they pay lawyers the big bucks

 

[Martha]

Good point Steve. As a number of us said, we can't answer how to structure a business sale in soundbites. The seller is going to have to talk it over with a lawyer.