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Lev
Lev, Tax Advisor
Category: Tax
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Experience:  Taxes, Immigration, Labor Relations
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When selling a business, how can I estimate the (leftover)

Customer Question

When selling a business, how can I estimate the (leftover) earnings after taxes?
Bought a business for 1.2m with 1m bank loan (loan balance is now 700k). May be selling at 1.7m. So is this how to roughly calculate? 1.7m - 700k = 1m cash. Then to pay taxes of 1.7m-1.2m = 500k gains @ 25% = 125k. So 1m cash - 125k tax = 875k remaining cash? I am sure there are different tax rates based on company structure, stock, etc but is this at least generally the correct formula?
Also, when I say 1.2m (it means price of 900k plus 300k inventory) and when I say 1.7m (it means price of 1.4m plus 300k inventory), this doesn't change anything (for the most part) right?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

Several issues...

First of all the loan will NOT affect your tax liability.
When you took a loan - proceeds were not included into your income - correct? That is because you were expected to pay that amount back. So when eventually you pay it back - that is NOT deductible.

Second - taxable income is calculated differently whether you sell shares of the corporation or you are selling assets.
If you purchase shares of corporation for $1.2m and sell shares for $1.7m - your taxable gain is the difference $.5m.

Assuming you held shares for one year or longer - and the gain will be long term gain taxes at reduced rate - most likely 20% plus additional AMT and Net investment tax - total about 28%.

Expert:  Lev replied 1 year ago.

The treatment would be different if you have asset sale - not stock sale.

The sale of a business usually is not a sale of one asset. Instead, all the assets of the business are sold. Generally, when this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory or stock in trade. The gain or loss on each asset is figured separately. The sale of capital assets results in capital gain or loss. The sale of real property or depreciable property used in the business and held longer than 1 year results in gain or loss from a section 1231 transaction. The sale of inventory results in ordinary income or loss.Liabilities assumed by the purchaser is treated as cash payment.Generally, both the purchaser and seller must file Form 8594 and attach it to their income tax returns when there is a transfer of a group of assets that make up a trade or business and the purchaser's basis in such assets is determined wholly by the amount paid for the assets.So - we need to start with a list of assets - and will need to assigned a sale price to each asset - as agreed between parties.Then - we will determine the gain or loss on each asset separately and separately will determine how that gain or loss is treated.