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Mark Taylor
Mark Taylor, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 1835
Experience:  Certified Public Accountant
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I am a partner in a business that is in the process of being

Customer Question

Hi, I am a partner in a business that is in the process of being sold, I hold 4% of the shares which will amount to $40,000 what is the best way to handle this to avoid paying taxes on it.
Submitted: 9 months ago.
Category: Tax
Expert:  Mark Taylor replied 9 months ago.

Hi, my name is Mark. I will be happy to help you with your question. What type of entity is being sold (LLC, S-Corporation, C-Corporation)?

Customer: replied 9 months ago.
Expert:  Mark Taylor replied 9 months ago.

What kind of business is being sold? Do you have inventory?

Customer: replied 9 months ago.
It is a RV manufacturing company, yes there is inventory.
Expert:  Mark Taylor replied 9 months ago.

With a sale of an LLC interest there is likely to be ordinary income for any hot assets. Hot assets would include any receivables if the LLC was reporting on a cash basis, the gain on inventory if the Fair Market Value is greater than 120% of the carrying cost, and potential depreciation recapture.

Do you know what your basis in the LLC is? Do know what the value of your capital account was?

Expert:  Mark Taylor replied 9 months ago.

Unfortunately there is no way to avoid paying taxes on the transaction. The sale of an LLC interest is a bit more complicated than the sale of a corporate interest. With a corporation your basis is what you purchased the shares for. Let's assume an individual bought the shares for $20,000 and sold the shares 3 years later for $40,000. You clearly have a $20,000 long term capital gain ($40,000 less $20,000). With an LLC you would need to considered the tax treatment of certain assets at the time of the sale. As I mentioned some of these assets are unrealized receivables, appreciated inventory, and depreciation recapture.

Customer: replied 9 months ago.
Let me rephrase my question. I am not just selling my portion of the business. The whole business is being sold to a third party the will keep all of the inventory, accounts receivables etc... So basically I will walk away with a check for the value of my shares.
Expert:  Mark Taylor replied 9 months ago.

So the business sold for $1 million. Most likely the tax returns were filed on an accrual basis so there probably will not be any unrealized receivables. When the business is sold it is as if all the assets are sold for their fair market value. So if there was $300,000 in inventory that has a fair market value of $360,000. There is an ordinary gain of $60,000. Your share would be 4% of this amount. If there is any equipment or real property this is the potential for depreciation recapture. I understand your confusion but an the sale of an LLC is much more complex than the difference between the purchase and sales price of your interest.

Expert:  Mark Taylor replied 9 months ago.

On this transaction you will likely have some ordinary income and potentially a capital gain or capital loss.

Expert:  Mark Taylor replied 9 months ago.

Do you know if the LLC was treated as a partnership?