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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10109
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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Considering Selling my trucking business ( Incorporated, S

Customer Question

Considering Selling my trucking business ( Incorporated, S Corp ). I am the sole owner. Have around 200,000 basis and looking to sell @ 1,200,000. Met with a very interested buyer. I will offer seller financing .. Willing to take $700,000 down and finance $500,000 @ 3 1/2% (50% discount to current business loan rates ) over 5 years. As an S corp, will I be subject to double taxation? If so, what can I do to avoid that? The sale will consist of 12 trucks and 8 routes I run. The value is in the routes which I would consider to be good will. I have another entity ( LLC ) that offers consulting to local trucking companies. Does the financing have to be strictly via a note? If so, will I be taxed on the difference of 700,000 and my 200,000 basis and then pay tax yearly ( Cap gains or personal income tax? ) on the 500,000 paid out to me over 5 years. Should I come up with a employment agreement between me personally and the buyer or a 5 year contractual agreement ( factoring the interest that would have been earned on the note ) between my LLC and the buyer in order to put myself in a better tax situation. Would this be cap gains rates ( State of NJ ) or other? Can my S corp take the 700K down and the LLC write a note for 500K ? Lots of questions.. sorry
Submitted: 5 months ago.
Category: Tax
Expert:  Lane replied 5 months ago.

Hi,

...

First, there are two general ways to do this; an asset sale and a stock sale.

...

With a stock sale, the type of assets that make up the sale are irrelevant, you new owner simply steps into your shoes, in terms of depreciation on existing assets, etc. and the sale is all long-term capital gain rates to you ... likely, by far the simplest and best alternative from a tax standpoint for you.

...

Se can get into the asset sale in a minute, but while on the stock sale, by providing financing you are going to be treated by IRS as doins an "installment sale," for tax purposes.

...

As an example, without the installment method of reporting taxes, if you sell property for $200,000, but the buyer can only pay with a $30,000 down payment, with the rest payable over the next 5 years, then you would have to pay tax on the entire profit, even though you only received $30,000 in the 1st year. (ALTHOUGH, you may want to do this if you anticipate that either tax rates or your tax bracket will be higher within the term of the installment payments -and you CAN elect out of installment sale treatment)

...

But under installment sale reporting the annual amount of gain reported as the payments are received is prorated.

...

here's the formula:

...

Annual Gain=Total Gain / Contract Price x Annual Payment received

...

You'll report the interest received AS interest ... but your total amount received is part gain (as per the formula above), part interest, and part return of your basis.

Expert:  Lane replied 5 months ago.

With the asset sale, THIS is where your allocation of purchase price to the various assets drives the typoe of taxation ... and there's a form Asset Acquisition Statement Under Section 1060 (form number 8594) that both you and the buyer must file .. and which must agree, about that allocation.

...

When the buyers are purchasing the tangible and intangible assets from a corporation, or purchasing the business from a sole proprietor, a partnership, an LLC or LLP, the purchase price is usually allocated to some, or all, of the following components:

  • Tangible Personal Property (trade fixtures, furniture, equipment)
  • Leasehold Improvements
  • Value of Premise Lease (if the lease is at below market rent)
  • Covenant Not to Compete (include time and distance of covenant)
  • Training & Transition (include schedule of time, hours, etc.)
  • Registered Vehicles (do not include in Tangible Personal Property above)
  • Liquor License (include license type and number)
  • Customer List
  • Goodwill
  • Buildings
  • Land
  • Inventory
Expert:  Lane replied 5 months ago.

And as you might suspect, what's good for the seller, the buyer must suffer (from a tax standpoint)

...

For example, the Value placed on Tangible Personal Property (trade fixtures, furniture, equipment):

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

...

For goodwill:

    Seller: If held for more than one year, is long-term capital gainBuyer: Amortize over 15 years
Expert:  Lane replied 5 months ago.

Good will?

    Seller: If held for more than one year, is long-term capital gainBuyer: Amortize over 15 years
Expert:  Lane replied 5 months ago.

Installment swale would still apply, but as you can see some of the items in the asset sale would cause Ordinary income to be recognized in those installments as well

Expert:  Lane replied 5 months ago.

(sorry for the typos, system isn't letting me edit for some reason)

Expert:  Lane replied 5 months ago.

Please let me know if you have any questions at all.

...

Thank you!

Lane

I have a law degree, (Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in financial accounting & tax, a BBA, and CFP & CRPS designations, as well - I’ve been providing financial, Social Security/Medicare, estate, corporate, non-profit, and tax advice, since 1986.

Expert:  Lane replied 5 months ago.

By the way, here's the IRS guidance on installment sales: https://www.irs.gov/taxtopics/tc705.html

...

And here's a listing of tax treatment of various assets and/or agreement for both a stock sale and a non-stock (asset) sale:

...

Stock Sales

Value placed on Stock:

  • Seller: Capital gains tax rate (currently at 15%) for stock held more than one year
  • Buyer: No write off; must accept assets at current book value (i.e., existing depreciation schedule)

Value placed on Covenant Not to Compete:

  • Seller: Ordinary income to recipient (is considered personal to seller/principal)
  • Buyer: Amortize value over 15 years

Value placed on Training/Consulting Agreement:

  • Seller: Ordinary income to recipient
  • Buyer: Expense out as paid

Non-Stock ("asset") Sales

Value placed on Tangible Personal Property (trade fixtures, furniture, equipment):

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Leasehold Improvements:

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Premise Lease savings (if the lease is at below market rent, it is an intangible asset):

  • Seller: If held for more than one year, is long-term capital gain
  • Buyer: Amortize value over 15 years

Value placed on Covenant Not to Compete (include time and distance of covenant):

  • Seller: Ordinary income as received
  • Buyer: Amortize over 15 years

Value placed on Training/Consultation (include schedule of time, hours, etc.):

  • Seller: Ordinary income as received
  • Buyer: Expense out as paid

Value placed on Registered Vehicles (do not include in Tangible Personal Property above):

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Liquor License (include license type and number; is an intangible asset):

  • Seller: If held for more than one year, is long-term capital gain
  • Buyer: Amortize over 15 years

Value placed on Customer List:

  • Seller: Ordinary income as received
  • Buyer: Amortize over 15 years

Value placed on Goodwill:

  • Seller: If held for more than one year, is long-term capital gain
  • Buyer: Amortize over 15 years

Value placed on Buildings:

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: Establishes basis, depreciate per IRS schedules

Value placed on Land:

  • Seller: If held more than one year, the gains in excess of depreciation are long-term capital gain; otherwise ordinary income
  • Buyer: No immediate tax impacts

Value placed on Inventory:

  • Seller: Ordinary income, to the extent that it is over basis
  • Buyer: Treated as "cost of goods sold" upon sale of products

...

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