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I have a trucking company with a tire service as a dba. I should

have really not put them...
I have a trucking company with a tire service as a dba. I should have really not put them in together as they really have nothing to do with each other, it was just easier to do it that way. I am now splitting up with my ex-fiance and we are splitting up the business, the trucking company to him and the tire service to me.

I received an answer from a business law professional telling me to take the assets that comprise the tire service business and put them into a new business, which I do intend to do. Then I need to prepare a document saying all the assets that constitute the tire service business have been transferred to my new company in exchange for my interest in the trucking business. And, that ownership interest would be transferred to my ex or back to the trucking company. I would then resign from all positions in the trucking company and we would go our separate ways.

I was told it should not have any tax impact on me as the assets I acquire will have the same tax basis as they did in the original company. What I need to do now is structure the exchange of ownership to avoid taxes. Can someone please let me know how I can structure this document?

I need to do in order to be totally free of him and the trucking business. I am the president of the company. His name is XXXXX XXXXX the company yet. The trucking business is an s-corp. in the state o Florida. Thanks, LuAnn
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Answered in 1 hour by:
1/2/2012
Tax-Scholar
Category: Tax
Satisfied Customers: 89
Experience: Helping customers comply with and plan for income taxes
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Tax-Scholar :

Thanks for using Just Answers. My goal is to provide the same expert advice I give my local clients but for a fraction of the fee.

Tax-Scholar :

The S Corporation will need to come up with a buy-out agreement that can take the form of either a redepmtion or a buyout.

Tax-Scholar :

 


The other option might be to divide the business as part of the divorce decree.

Tax-Scholar :

A CPA would have to look closer to make sure there wasn't any gain. If the business was an LLC it would be easier to avoid taxation. I'll open the question up as I'm sure some other experts can add to this.

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Horace
Horace, Accountant
Category: Tax
Satisfied Customers: 3
Experience: Experienced preparing books and taxes for individuals, small and very large international firms. www.horacetolliver.com
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Splitting the business can be complicated. This is why: say both businesses rely on certain key assets such as a facility that both the trucking company and tire business use.

In cases where splitting the business is difficult, most of the time people either sell the business outright and split the proceeds or calculate the total value of the business and give them their share of the business based on the calculation.

If the business can not operate separately, splitting the business is not a viable option, and you will have to either sell it or calculate a value and give the other party their share of the current net worth of the business. There are other options, but they are much more complicated and don't seem to fit your circumstances with you both wanting to go your separate ways.

There is NO company structure to avoid paying taxes unless you reduce the basis of the assets through say rapidly depreciating them until their value is not an issue.

For example, say you were giving away a truck that was part of the business transfer/sale that was set to decline in value to basically nothing in 5 years. Well if you expensed or decline the value of the truck to scrap value now by changing your depreciating method then the recipient could receive an asset that had little value to tax. And most likely your value has declined from the purchase date anyway.

You need to get an accountant involved in doing this to make sure you don't break any tax laws, but it is legal to change your depreciation method. You just want to correctly document this if it comes under scrutiny.

Yes, you are right if you transfer/sell the assets at your basis and that is what I see this as as a business sale at the cost you paid for it. You will not owe any federal taxes but as for sales taxes (see and http://dor.myflorida.com/dor/businesses/tax_clearance.html), but he is not paying for them.

Avoiding taxes on this business sell is all about what you value the business assets at--Not what the company's ownership structure is. There is no company structure to avoid paying taxes on a sell when he is not paying for the assets--unless the value is quite low. See this as a refresher http://en.wikipedia.org/wiki/Gift_tax_in_the_United_States and http://www.justanswer.com/tax/0144q-avoid-taxes-when-selling-business.html

When a person doesn't pay for something it comes under a different tax category such as a gift, compensation, legal settlement, etc all with their own tax laws.

Therefore, you fall into an issue where it looks like you are giving them a gift which is taxable above a certain amount. Or if you claim you are giving them compensation for services provided then there are some payroll taxes associated with that.

Therefore, the key is valuing the assets as low as possible, or keeping you as the owner of all the assets and structuring the business that way. But it seems you want to separate yourself from this business on paper so that's not an option.

FYI: If he was a prior owner of some company assets before you tried to split the company you could get a simple contract from NOLO or somewhere and simply segregate what his ownership share was (truking company) and yours the tire company.

Keep in mind prior oral contracts between you and your ex can always later be formalized in a written contract. Then there would be NO change in ownership, so no tax implications. But I don't know what conversations you had in the past of course.

Please accept my answer unless my explanation needs clarification. And this is a very complicate, difficult question involving research on my end, so a bonus would be greatly appreciated ;-)
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Good luck with it.
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Customer reply replied 6 years ago

Hey, Horace. Happy New Year! Thank you for your answer.

 

I'd like to clarify a few things so that there won't be so many variables and you can make it clearer of what I need to do.

  1. The business can easily be split apart as far as running them as they don't have anything in common, and they are run out of my home office.
  2. The trucking company owns a semi, which was worth about $5,000 when we bought it several years ago and a flatbed trailer, which was about $5,000 when we bought it in 2006.
  3. The tire business owns a 1999 Dodge Dakota, which was $4,000 when we bought it in 2008, and a compressor which we bought for $2,000 in 2008, and assorted small tools.
  4. Everything we bought (except the compressor) was used when we bought it.
  5. He is part owner along with me on the 1999 Dodge Dakota, so can you clarify further what you meant in your paragraph about his being prior owner of some company assets and also about prior conversations. If you could, please include a sample conversation that could used an as oral contract to separate us.
  6. Also, if I were to give the trucking company assets to him as payroll compensation, what would that do to me tax-wise or to him tax-wise? What about giving them as a gift?
  7. The part you said about maybe just owing sales tax, who would be responsible for that?

Thank you so much for your time and expertise.

You situation is fairly straightforward. Because you both own the assets as partners you simply need an agreement putting in written form who owns what. There are no tax implication because ownership of the assets have not changed from the original owners.

For example, if you were getting a divorce and you had an oral agreement stating during the marriage you own the washing machine, and he owned the drier. In the divorce agreement, you would simply write you own the washer, and he owns the drier per prior oral agreement--end of story--No tax implications.

Federal and sales taxes are primarily based on property exchanging hands but that is not the case in your situation the way you described. It was just never formalized because you were together in the business, and there was no need to. Now you simply need to document your prior oral agreement on who owns what.

I'm not a lawyer, so I won't draw up the terminology, but check out Web sites like www.NOLO.com that provide standard contract language which will hold up in court as legally binding, compared to us lay persons (or CPA's in my case) writing up something which is not legally enforceable. You may also want to get an attorney to look it over to check for errors.

You can go on line or look for similar equipment with the same model and year as yours to find the new value, but I'm pretty sure that equipment is worth significantly less than when you paid for it to determine the value of the property if you decide to sell it. The basis has diminished from the initial purchase date.

The value of the equipment would be his compensation if you decide to do it that way. And be exactly the same as if you paid him in cash. If he received a 1099 as an independent contractor would instead of a paycheck as an employee would the income he receives he would be totally responsible for any social security taxes, sales or local taxed owed on the amount.

If you gave him a gift you would pay the taxes on any amounts given over $13,000. See http://www.irs.gov/businesses/small/article/0,,id=108139,00.html. All of the trucking company business doesn't sound like it's worth over $13,000 in terms of equipment alone if you factor in the decline in value from owning it over the years.

However, you would make this much more complicated if you do it as a sell rather than giving him the property which is already his by writing an agreement simply stating this was his property per prior agreement during the partnership.

I hope that clarifies my answer, if so, please press accept and bonuses are always appreciated ;-)
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What I'm trying to say is you are dissolving a partnership in essence.

You are simply giving him his share of the assets.

It's not a taxable transaction if you approach it in that manner.

Please accept the answer if my response is clear.

And thanks for choosing just answer.
Horace
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