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Merlo, Accountant
Category: Tax
Satisfied Customers: 9783
Experience:  25+ years tax consulting. Specializing in returns for US citizens living abroad
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What are the tax implications when selling a business ...

Resolved Question:

What are the tax implications when selling a business in particular how are the possible capital gains calculated?
Submitted: 9 years ago.
Category: Tax
Expert:  Merlo replied 9 years ago.


Can you tell me what type of structure your business is set up as? sole proprietorship, partnership, LLC, corporation?

Customer: replied 9 years ago.
We are a corporation. Tppe S I think. 2 partners
each with 50% of the stock
Expert:  Merlo replied 9 years ago.

Hello againCustomer

If you are set up as an S Corporation, then the income from that business is not taxed at the entity level, but rather at the shareholder level, and each shareholder receives a K-1 form at the end of each year reporting his or her share of the income. The same will hold true on the sale of the company. Any gain or loss from the sale of the business, whether it be classified as ordinary income or long term capital gains, will filter down to each shareholder and be reported on the K-1 form, which the shareholder then files as part of his personal income tax return at the end of the year.

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Customer: replied 9 years ago.
The sale price of the business is the appraised
price of the machinery.A large portion of which
has been written down or depreciated over the years.
What I want to know is how are the capital gains
taxes if any computed?
Expert:  Merlo replied 9 years ago.

Hello again zellman,

I am assuming that the machinery you are selling has been held by your S Corporation for more than one year. To determine the taxable amount, you would take the sales price less your adjusted basis. The adjusted basis will be the original price you paid for the machinery plus the cost of any substantial improvements, less any depreciation taken on the machinery. The difference between the sales price and your adjusted basis will be the amount that is taxable, and will be divided equally among the shareholders and reported on their K-1 forms. Each shareholder in turn will pay capital gains tax on their portion of the gain, and the capital gains tax rate is currently capped at 15%.

If you found this helpful, kindly press the "Accept" button. Positive feedback is also greatly appreciated. Thanks again for the question.