The buying and selling of a business is one of the most important events in the life of a business person. The financial success or failure of the purchaser or seller of a business frequently depends upon his or her lawyer’s and accountant’s familiarity with the tax consequences of their transactions.
It is the lawyer’s and accountant’s responsibility to his or her client to be knowledgeable concerning the tax and other legal and financial ramifications of his or her client’s transaction. For the attorney representing the seller, the after-tax dollars that the seller can retain after the sale are of vital importance.
For the attorney representing the purchaser, the future success of the purchased business
could depend upon the net dollars available to the business after payment of expenses and
In both situations, the lawyer’s representation and advice concerning the original transactions, especially the initial contract of sale, will determine the future tax consequences.
The sale of a business by a seller is a taxable event in which the seller recognizes gain or loss on the sale. The tax consequences which will be recognized by the seller depend upon two factors: the form of the business sold and the form of the payment for the business. The purchase of a business by a purchaser is not a taxable event which requires the recognition of gain by the purchaser. The purchaser’s tax goal is to recoup his investment and operate the business in a manner which will allow him to reduce his taxes. These tax consequences will depend upon the form of the acquisition and the form of the operation
of the new business.
A business can be operated as an individual proprietorship, a partnership, or a corporation. If the business is a corporation, it might be a Subchapter S corporation, that is, a corporation which has elected not to be taxed upon its corporate income, but to have that income taxed directly to its shareholders.
Sale of Sole Proprietorship
- A proprietorship, for tax purposes, is not an entity separate and distinct from the individual who owns it and has no separate existence.
- The sale by an individual of a proprietorship business is the sale of the individual assets of the business. The seller will recognize and be taxed upon the gain or treat as a loss an amount based upon the difference between the
amount he receives for each individual asset of the business and his tax basis in each of these assets.
- The nature of his gain or loss, capital or ordinary, will depend similarly upon each individual asset comprising the business
Sale of a Partnership Interest.
- The sale by a partner of a partnership interest is the sale of a partnership interest separate and distinct from the individual assets owned by the partnership.
- The seller will recognize and be taxed upon the gain or treat as a loss an amount based upon the difference between the amount he receives for his partnership interest and his tax basis in this interest. The gain or loss is considered gain or loss from the sale or exchange of a capital asset.
- An exception to this rule exists with respect to gain attributable to “substantially appreciated” inventory.
- The seller of a partnership interest need not be concerned with the individual assets owned by the partnership except to determine whether or not the partnership has non-income producing capital or appreciated inventory, or unless the partner has claimed an investment credit.
- Generally, the selling partner’s tax consequences will depend upon his tax basis for his partnership interest, as opposed to the tax basis of the individual assets owned by the partnership.
- Generally, a limited liability company (LLC) will be classified and treated as a
Sale of a Corporation
A seller who wishes to sell his corporate business can:
- sell the stock in the corporation to the purchaser,
- cause the corporation to sell its assets to the purchaser, or
- cause the corporation to distribute its assets to its stockholder who then sells the assets to the purchaser. If the seller causes the corporation to sell its assets to the purchaser, he must then, if he wants the proceeds from the sale, arrange for the corporation to distribute the proceeds to him. The last two methods are less desirable since there may be a double tax, one tax at the corporate level and one tax at the individual level.
Tax is the center of sale of a valuable business. We can structure the sale by providing tax counsel or we can represent you during the entire course of the transaction including contract drafting to closing.
I can help you at every stage of your investment: entity selection (LLC, etc), tax planning, tax compliance, purchase, depreciation, leasing, and sale.
Like Kind Exchanges §1031
We provide tax counsel in like kind exchanges from planning and document drafting to closing
Installment Sales §453
We structure transactions to satisfy §453 Installment Sales. IRC §453 allows the deferral of capital gain until money is received on the carryback note.
Form 1040, Schedule E
We can take a close look at your Schedule E to ensure proper income and expenses are reported. We can check to make sure the adjusted basis is tracked properly for depreciation and sale purposes.
Colorado Real Estate Tax Planning
Colorado taxes capital gains from the sale of Colorado real estate even if the taxpayer is a nonresident of Colorado. As an example, if a taxpayer lives in California but owns a ski condo in Aspen, any gain on the sale of that condo must be reported using a Colorado Form 104 and tax paid. In addition, rents must are taxed in Colorado even if the taxpayer is a nonresident.