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BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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We are considering selling our family business and want to

Customer Question

We are considering selling our family business and want to know is we have any tax exemption on the profit from the sell of our family business?
Submitted: 1 year ago.
Category: Tax
Expert:  BK-CPA replied 1 year ago.
Hello and thank you for your question. The general answer to that question is no. I.R.C. §§ 61; 1001; 1. Is there any reason you should? Depending on how the business is taxed (sole proprietorship, partnership, s-corporation, or c-corporation), your tax may be figured differently. If a sole proprietorship, the sale of the business is treated as the sale of its underlying assets. The amount realized is allocated to the underlying assets based on their fair market values. See I.R.C. § 1060 and Form 8594: I.R.C. § 1060 Form 8594:,-Asset-Acquisition-Statement-Under-Section-1060 If it is a partnership, then in you may recognize a capital gain on the sale of a partnership interest. Capital gains are taxed at lower rates than ordinary income in general. I.R.C. § 741: If you sell your stock in a corporation, then again you may have capital gains treatment. I.R.C. §§ 1001(a); 1221(a). You may be able to exclude some of these gains from your gross income under I.R.C. § 1202: Some easier reading on that exclusion is here: Note that if the corporation redeems stock from family members, as is commonly done to facilitate a sale, the attribution rules under §318 and the treatment of the sales proceeds (whether a dividend or a capital gain) under §302 can be tricky. I suggest you get a tax professional to assist so as to ensure capital gains treatment is obtained. Chances are you will have many more questions related to the sale as you move forward, including what tax forms need to be filed, how much tax might you expect to owe, how should the deal(s) be structured, etc. I strongly recommend you engage in a family tax planning session with a professional that will be able to help everyone achieve their goals. This is typically one of those things you don't want to try alone or even with some simple internet guidance. A good tax professional will probably save you more money here than they charge you (as is probably the case most of the time, with exceptions for easy returns best suited for something like TurboTax...). To wrap up, I'll note that net (long-term) capital gains are taxed at 0% for those in the first two tax brackets. I.R.C. § 1(h). Otherwise, the tax rate is only 15% for all but the highest earners (then it's 20%). If some family members don't have enough income to get past the first two tax brackets, they may owe nothing in taxes on that portion of any net capital gains that, when combined with their other income, does not exceed the first two tax brackets. Your best chance to receive a "tax exemption" as you request, is therefore to take advantage of I.R.C. § 1202 and/or the 0% capital gains rates under I.R.C. § 1(h). After that, you want to achieve capital gains generally taxed at not more than 15%. What you want to avoid is recognizing ordinary income taxed at regular tax rates, which generally happens when sole proprietorships, partnerships, and s-corporations sell things like inventory and depreciated property (s-corporation shareholders can instead sell their stock). I hope this is helpful.
Expert:  BK-CPA replied 1 year ago.
Please let me know if there is something more I can do to help clarify. If you found this helpful, please take a moment to rate the answer. It is the only way experts here are credited for their time in assisting people. Thank you!