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We invested $80,000 to start our LLC business and recently…

Customer Question
We invested $80,000 to...

We invested $80,000 to start our LLC business and recently sold its flagship software product for $30,000 plus 20% stake in the new company under the new owner. We have filed paperwork to close down our business with the States of DE and MD. In addition, throughout 5+ years of tax returns, we amortized and depreciated our software assets from $50K to 0.
Is the sale of the software product considered long-term capital gain? How are the taxes considered for the 20% stake in the new company? Are there any tips on how to lower our taxes before the year end?

Accountant's Assistant: The Accountant will know how to help. Is there anything else important you think the Accountant should know?

Hi, could you please help me with the scenario above?

Submitted: 3 months ago.Category: Tax
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12/27/2017
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago
PDtax
PDtax, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 5,011
Experience: 35 years tax experience, including four years at a Big 4 firm.
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Hi from Just Answer. I'mCustomer and can assist.

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Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

The sale of your software product is ordinary income for the $30,000. The sale of the equity interest depends on how the sale was structured and the terms of your deal.

Can I suggest a phone call service to discuss alternatives?

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Customer reply replied 3 months ago
I read an article (https://www.bizfilings.com/toolkit/research-topics/running-your-business/tax-aspects-of-selling-your-business-an-overview) that instead of selling the company, if we sold the product it's considered capital gain instead income. "As the seller, you will probably want to allocate most, if not all, of the purchase price to the capital assets that were transferred with the business. You want to do that because proceeds from the sale of a capital asset, including business property or your entire business, are taxed as capital gains."
Customer reply replied 3 months ago
The equity interest is simple as that, a membership interest in the new company, nothing special. How would taxes be considered?
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

Sounds like the author considers you selling your business. You are selling an interest, which means you continue to operate it.

If you were liquidating a portion of your business, say like selling your office products division while retaining your consumer products division, you could get capital gain treatment on the sale of a segment of your business.

If your facts support that treatment, I would agree with capital gain treatment.

Positive feedback is appreciated if I have answered your questions. I'mCustomer

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Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

I missed the new company setup. I thought your buyer bought 20% of your existing entity.

I will make a phone call offer to discuss in more detail.

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Customer reply replied 3 months ago
I think you misunderstood my questions. My scenario is that I'm selling my business/product and closing my company and no longer want to operate.
Customer reply replied 3 months ago
How much taxes would we be liable considering our initial investment cost? I can't see it as income taxes.
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

I misread. You are selling your company for cash and an interest in the acquirer and are shuttng down your business. I suspect you also get a job with the deal.

You get capital gain/loss treatment for the sale of your shares. You may have s corp income on the sale of your software first.

You need to determine the value of the shares you receive as part of the transaction, which could be taxable to you as capital gain.

I still suggest the phone call to discuss the tax treatment. See my offer.

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Customer reply replied 3 months ago
This is all LLC, no s corp. The new company by the new owner is also LLC. No job, just straight equity. I need numbers. What are the taxes considering initial investment cost (cost basis)?
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

Your tax gain is calculated as follows:

Original basis

Plus income earned, less losses

Plus additional investment, less withdrawals

Is adjusted basis.

Add income from sale of software

Updated adjusted basis

Then

Exchange of your shares for equity in new company

Capital gain on sale.

Thanks again for asking at just answer. Positive feedback is appreciated.

Customer/p>
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Customer reply replied 3 months ago
How would the 20% of the new company valued? No estimate is known to me since it's new. Would that also be capital gain?
Given my numbers, would my capital tax gain be zero? $30k sale - $80k cost = -$50k loss, also considering depreciations?
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

You do have to value the interest you received as sale proceeds. If your agreement does not specify, you will need an estimate of value.

It might have little value now, for example, if you were given employment agreement to stay with the new venture. Your specifics will dictate.

If you did not include employment in your agreement, then a reasonable value must be determined.

Customer/p>
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Customer reply replied 3 months ago
This is not helpful at all to me. I'm more confused after all the answers and corrections I have to make to your answers. I still do not know how to consider the following into my taxes: initial investment cost, depreciation of asset, how much taxes, capital gain vs income, useful tips on how to value my new interest in the new company, tips on how to reduce taxes before year end as asked in my initial request.Your generic answers are not useful. You also lack understanding of my scenario.
Tax Professional: PDtax, Certified Public Accountant (CPA) replied 3 months ago

Specific above is available via the phone call offer made. Please consider accepting that for a phone call to address each of those areas in detail specific to you. That call would also allow for a 'fresh start' for you to identify terms of your sale that are still not provided, which would allow me to be specific in my response.

If that isn't agreeable, I will opt out and other experts can assist.

Customer/p>
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