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My wife and I are 2 of 5 owners in a Florida-based small business

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(combined ownership % of 34%)...
My wife and I are 2 of 5 owners in a Florida-based small business (combined ownership % of 34%) - we have been and S-Corp since inception in 2000 . We are close to being acquired by a much larger firm.

Initially this was going to be a stock sale - with my understanding that any amount we received above our basis would be treated as long term capital gains.

Now, the buyer is likely going to move ahead with an asset purchase rather than stock. However, they have given all owners time to consider the tax implications and (perhaps) request an adjustment to the purchase price based on more tax liability.

Can you tell me the tax implications to moving ahead with an asset sale?

FYI - my wife and I file a joint federal return.

Thank You,

JH - Orlando, FL
Submitted: 6 years ago.Category: Finance
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Answered in 24 minutes by:
7/7/2011
Financial Professional: Taxtom, Accountant replied 6 years ago
Taxtom
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Satisfied Customers: 2,364
Experience: 25 Years in preparing Personal and Business Tax Retuns
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Taxtom :

Hello, This transaction will flow different. First any stock in trade (inventory) that is sold above cost will be treated as oridianry income (taxed at a higher rate), depreciable assets held more than one year will be broken down individually and any amount above book value( depreciated value) will first be taxed as ordinary income up to purchase (recovered depreciation) and above that will be long term capital gains. Any real estate would also be first be taxed as ordinary income up to purchase (recovered depreciation) and above that will be long term capital gains. Any depreciable assets held for less than a year that is sold at a gain will be taxed as ordinary income. The basic questions will be what is your current income tax rate and will part of the proceeds put you in a higher bracket. To answer this question you need to know what the different gains are going to be, if the sale is mostly recover of investment and little gain it will not matter, like wise if the majority of the gain is from real estate than it make little differnce but if you have a large amount of depreciated assets that you are selling it could double your tax burden if you are in a higher tax bracket. . Thanks Tom

Customer:

Thanks - in this case, we are a technology firm. For the most part, the "assets" in this deal are not hard assets like inventory, equipment, etc... but instead are our intellectual capital, software, and client relationships. (There are some hard assets, but represents a small portion of the offer price).

Customer:

Does that mean we should assume the amount above basis will be treated as ord income? (in general). And yes, the payment from the deal would likely put us in the highest tax bracket for 2011. Our portion of the proceeds would be about 700,000 -

Customer:

And finally... the delta from a tax perspective is A) ordinary income tax rate (35%), minus B) 15% long term capital gain. So we could rough say they need to sweeten the offer price by 20% in order to put forth a "like" offer.

Customer:

that last line was a question - sorry forgot the questionmark

Taxtom :

Hello, You are talking of intangible assets that do not fall in the Capital Gain preferred tax rate. All proceeds from the sale of this intanagible would be taxed as ordinary income. Yes you would need to collect roughly 20% of the taxable portion of the sale of asset to be equal to the 15% rate. Thanks Tom

Customer:

got it - thanks for the help (although not the answer I would have preferred... ) - 35% is a big chunk.

Taxtom
Taxtom, Accountant
Category: Finance
Satisfied Customers: 2,364
Experience: 25 Years in preparing Personal and Business Tax Retuns
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Customer reply replied 6 years ago
Taxtom,

After meeting with our corp tax firm, Larson Allen, it seems the explanation you provided last week was significantly different from theirs. This concerns me.

As I described the situation, did you give consideration of goodwill in an asset sale? If not, why?

I would like a deeper explanation of why you say "All proceeds from the sale of this intanagible would be taxed as ordinary income"
Financial Professional: Taxtom, Accountant replied 6 years ago
Hello, Yes I did consider goodwill which would be taxed as an intangible asset. I am assuming you are not selling goodwill that is already on the books. I have to go a meeting now but will be back and give you some references for my conclusions. Thanks Tom
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Customer reply replied 6 years ago
Thanks - I would appreciate the references. We are being advised that as an S-Corp of over 10 years, the portion of assets classified as goodwill (the mojority of the asset as we're a service-based business) will be taxed at the 15% capital gains rate.

I'm not worried about whether either party is "right" or "wrong" - as I know their are specifics that come into play and differences in how agressive one can/should be within the tax code. The bigger issue for me is to make sure I have the complete picture before I make a potentailly costly misstep.

Thanks,

Jim
Financial Professional: Taxtom, Accountant replied 6 years ago

The difference in our advice as to be on how the assets are being viewed my advice is on the sale of individual assets and goodwill in this context is taxed at normal tax rates. Click on non-capital assets under 544 http://www.irs.gov/publications/p544/ch02.html#en_US_publink100072479 . Your advisers are indicating that you are selling all assets that constitute a business at one time and as such are treating it as a complete business as such they are using the residual method and in the case you would be able to be taxes under the Capital Gains tax rate. Look at Residual method near bottom of article. http://www.irs.gov/businesses/small/article/0,,id=98692,00.html

I took your sale of assets literally and did not consider that they would be buying all of your assets and should have given you both scenarios. Thanks Tom

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Customer reply replied 6 years ago
Thanks for the clarification. I feel better about this now. Regards - Jim
Financial Professional: Taxtom, Accountant replied 6 years ago
Your welcome, Thanks Tom
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