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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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We are in California and planning to purchase a restaurant

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We are in California and planning to purchase a restaurant form a friend. It will be asset purchase. She has been running the restaurant for 16 years and does not have any record of purchase of assets. We could either go high on asset value or high on good will
We would like to know how to structure the deal to be fair to both parties so as to minimize the tax consequences to both. This includes income tax, capital gains, state and local taxes, now and when we sell the restaurant in 6 years
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!
The business is a collection of assets, some tangible (real estate, inventory, etc) and some intangible (goodwill, accounts receivable, a trade name, etc). According to IRS rules, the buyer and seller must use the same allocation, so the allocation will have to be negotiated and put in writing as part of the sales contract.


Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred.


Seller's taxable income is calculated for each asset = (selling price) - (basis); If the asset was purchased - the basis is its purchase price; The basis should be adjusted by any improvement expenses and depreciation.


for asset sale by S-corporation following are income treatment:



  • Fixed Assets - capital gain (long or short term depending on time interval owned); depreciation recaptured - regular income.

  • Inventory and Supplies - regular income

  • Seller Intangibles/Customer Relationships - assuming created during the normal business procedure - regular income

  • Consulting agreement - assuming created during the normal business procedure - regular income

  • Non Competition Agreement - if any - regular income.

LEV :

 


So - from the seller's tax prospective - it would be more beneficial to recognize the gain on capital assets eligible for long term capital gain treatment, however - the selling price assigned to these assets should be based on their fair market value according to asset's condition - otherwise the IRS in case of audit might disagree with the allocation of the sales price among different assets.
From the buyer's tax prospective - depending on circumstances - if you want to recover the selling price as soon as possible by depreciating business assets - it would be more beneficial to assign higher price to assets with shorter depreciation period.
The goodwill is classified as the section 197 intangible asset and must amortize them over 15 years.

Customer:

What about the sales tax on the purchase of the restaurant. Is it charged on the full price of the restaurant or just the asset price?

Customer:

Also you mention asset sales by S Corp. This owner is an individual. Does the same treatment applies to her as well?

Customer:

The owner does not have any purchase receipt of the assets. Can she just estimate the value? Majority of the assets are 10+ years old may be as much as 16 years old.

LEV :

The same treatment regardless if the business is owned by individual, LLC or S-corporation.
There is no sales tax on the sale of business assets.

LEV :

See page 14 - http://www.boe.ca.gov/pdf/pub61.pdf


(1) EXEMPTIONS: • OCCASIONAL SALE OF BUSINESS

Customer:

Are you sure that there is no state or federal tax on sale of a business? I was reading up on the internet and saw several people who go the surprise! Could it be a state tax in California only?

LEV :

Information about purchase prices (asset' basis) will be needed for the seller to calculate taxable gains - that doesn't affect the buyer.
Most likely ass these assets are fully depreciated and their adjusted basis is zero. However they need to determine the original basis to recapture the depreciation. So generally they need to find out the amount of depreciation claimed for each asset.

LEV :

Are you sure that there is no state or federal tax on sale of a business?
There will be INCOME taxes both federal and California - but there will not be California SALES tax. In your previous question - you asked about sales tax.


Customer:

I read through page 14 and it seems no tax on asset purchase. So if the value is say $100 K, 50% asset and 50% good will, there will be no sales tax at all or just on the goodwill portion. Sorry I am asking too many questions but sort of critical at this stage!

LEV :

There will no be any sales tax at all on the sale of the whole business.
However - the seller will pay INCOME taxes calculated on his/her tax return.
Please feel free to ask.

Customer:

Thank you very much

Customer:

So it seems that it will be better to allocate more value to the assets from both seller's and buyer's perspective, tax wise?

LEV :

That is true - if the buyer want to recover the cost as fast as possible.
But you need to use the fair market value of these assets - so your ability to assign higher value is limited.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22980
Experience: Taxes, Immigration, Labor Relations
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