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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29975
Experience:  Taxes, Immigration, Labor Relations
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Need help with strategic tax planning of chiropractic

Customer Question

Need help with strategic tax planning for sale of chiropractic business. Two owners 70/30 split. We have an accountant but he is difficult to understand and we worry he isn't being attentive to our situation.
Total purchase price $175,000
$5000 currently in escrow with sales broker
$7250 additional paid to him upon closing
Remaining $162,750 paid to sellers
Although not agreed upon yet by buyer, assets are currently allocated as follows:
Equipment - $45,000
Restrictive Covenant - $30,000
Goodwill - $100,000
Our current CPA recommended this allocation which we assume is strategic and in our favor?
I (30% owner) am not listed on the LLC or sales agreement. Our accountant said it wasn't necessary and I could just be paid after the sale. Is this factual and of no concern?
We also asked what strategic options we should consider when selling to limit our tax liability. His reply was "nothing strategic" which is hard to believe. For example, if we were selling real estate we could use a 1031 exchange to avoid paying capital gains tax. (or something like that)
Essentially, we're looking for guidance in this process.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Several issues...1.We need to be clear who is the seller?If that is a partnership owns all business assets - the partnership as a legal entity is teh seller - and no need to list all partners.Thius aftre the partnership will complete the sale transaction - teh money will be distributed to partners and reported as such. 2.The sale of a business usually is not a sale of one sset.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.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.3.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.The gain on self-created intangible - such as goodwill and non compete agreement - is ordinary income.4.You may defer some gains (not avoid!) on assets by conducting section 1031 transaction - using proceeds to purchase like-kind assets.From assets you listed Equipment is eligible. So if you plan to purchase other similar Equipment - you may use $45,000 proceeds and tax liability on that part will not be recognized.The goodwill and Covenant agreement do not qualify for section 1031.5.The main advantage of selling the business as a whole is that proceeds are not ordinary business income and the gain is NOT subject to self-employment tax.Regarding income tax - most of your gain will be taxed as ordinary income - not as capital gain.6.The best option would be to treat the gain as long term capital gain.That would be true if you have a corporation and sell shares of the corporation which are held more than a year.But that would be less beneficial for the buyer.As you are selling as asset sale - each asset is treated separately.Equipment - the gain up to accumulated depreciation is taxed as ordinary income and the rest (if any) as long term capital gain - so you would need to know the basis and the accumulated depreciation.Restrictive Covenant - is self-created section 197 intangible - the basis is zero - so full amount will be taxed as ordinary incomeGoodwill - same as above - full amount will be taxed as ordinary income.So - with all these details - all (or almost all) gain will be txed as ordinary income - and there is nothing you really may plan here...
Customer: replied 1 year ago.
I do not have a better idea of what to do after reading this...I'm actually more confused.I apologize. I am a bit more confused after reading your reply.Do we want the asset amount higher or lower? which is more beneficial?
What is the capital gain tax percentage? Is it typically higher or lower than ordinary income tax?
How is the capital gain taxed? After filing 2016 taxes or after sale is complete? Is the business taxed?
Expert:  Lev replied 1 year ago.
May be you prefer to discuss over the phone?I am sending you an offer.
Customer: replied 1 year ago.
I don't intend to be rude here but I don't need to pay another ~$50 for a phone conversation. I would like like more a more concise answers please. Let me try again in my questioning...If a loss is NOT realized then (as the seller) do we want assets to reflect a higher or lower asset allocation?
If a loss IS realized then (as the seller) do we want assets to reflect a higher or lower asset allocation?And please explain the WHY behind the answers for the two questions above.Thank you and please reply ASAP.
Expert:  Lev replied 1 year ago.
You absolutely not obligated to pay if you feel that offer doesn't benefit you.I just though it woudl and made an offer - but that is up to you if you are willing to accept or not.That is perfectly fine..If a loss is NOT realized then (as the seller) do we want assets to reflect a higher or lower asset allocation?The gain or loss is realized when the asset is sold. If the asset is not sold - its value may go up and down - but there is no gain or loss realized.So if the gain or loss is not realized - means - nothing is sold - the allocation woudl not affect the tax liability of neither seller not buyer. If a loss IS realized then (as the seller) do we want assets to reflect a higher or lower asset allocation?When assets are sold - and either gain or loss is realized - from tax prospective the seller and buyer have different objectives.In general - to minimize tax obligations- the seller would prefer long term capital gain vs ordinary income. Correspondingly - when the sale price is allocated between assets - the buyer prefers larger sale price to be allocated to assets on which the gain is treated as long term,- the buyer would not worry how the seller will treat the gain - but would worry how he will be able to deduct the purchase cost. That deduction is reported as depreciation or amortization. So the buyer might prefer larger allocation to assets with shorter depreciation period or to those assets which qualify for section 179 deduction..As everyone's situation different - there might be different objections - examples above to illustrate different preferences. So it is important to have your preferences before you start negotiating - for instance as a seller you might agree to some buyer's preferences - but that would be reflected in the higher sale price.
Customer: replied 1 year ago.
(quick reply)
To be clear...
I WANT to pay for the service because I need the professional guidance. I prefer communication via text to reference going forward as we speak with our accountant. Thank you for your reply. I plan to read though and detail it this evening.
Expert:  Lev replied 1 year ago.
There is no issues. We may continue communication.