Taxes after business sold

[tloonya]

Hello everyone.

I am selling my business and I had not though of paying taxes after it.
Let's say I am selling for $99K.

Potential buyer wants me to negotiate. I am willing.
I think they buying for cash. That's what my broker said.
But I forgot about taxes.
Tried to read but...OMG! What language its written in?

Any advice is appreciated.

[Ombud]

Move post to tax thread

[tloonya]

I didn't know there is tax thread...

[tloonya]

Hello everyone.

I am selling my business and I had not though of paying taxes after it.
Let's say I am selling for $99K.

Potential buyer wants me to negotiate. I am willing.
I think they buying for cash. That's what my broker said.
But I forgot about taxes.
Tried to read but...OMG! What language its written in?

Any advice is appreciated.


P.S. Also Forbes is saying there are ways to avoid paying taxes.

[Ombud]

Good. Now it's where mwcpa, rangerj, and some of the other CPAs who actually make a living doing this stuff will see it!!

[tloonya]

Thanks Ombud.

I am very curious is how you have to pay taxes but you can avoid it.
The only thing I can think of is to reduce selling price by amount of taxes
and make buyer to give you cash and sell it for $1.

But it isn't kosher, right?

[mroped]

You see that right there is what makes America great: nobody wants to pay taxes and everybody wants to take advantage off the government programs!
Flash news: in order to function properly a government needs funding, funding comes from taxation. No taxes=no funding=no government programs to take advantage or benefit from!

Ofcourse, personally I see it the same way: why pay taxes if there is a way out of it? 

[tloonya]

I know, right? it is like no one ever wondering where are these foodstamps are coming from...
And actually I do believe it is not an 'American' issue, anywhere in the world people want the same!

[kjto1]

You should probably talk to your accountant.  They could answer a lot of your questions tailored to your specific situation.

[Ombud]

You could put money into a:

Retirement Plans for Self-Employed People

Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans?

Here some highlights of your retirement plan options.

Simplified Employee Pension (SEP)
Contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $52,000 for 2014 ($53,000 for 2015).
Establish the plan with a simple one-page form: complete Form 5305-SEP, Simplified Employee Pension - Individual Retirement Accounts Contribution Agreement, or an IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies; and open a SEP-IRA through a bank or other financial institution.

Set up the SEP plan for a year as late as the due date (including extensions) of your income tax return for that year.

so there's 25% for 2015 + 25% for 2014 if 2014 is on extension thus delaying taxes on up to $105,000

[phil5185]

Canada or US?

[Peace77]

US.   If I recall correctly, Pennsylvania.

[phil5185]

For most sales, the federal rate for 2015 is 15% of your profit.  (And if you have a capital loss you may write off some of it.)

[taz157]

Sept 19, 2015 17:40:17 GMT -5 phil5185 said:

For most sales, the federal rate for 2015 is 15% of your profit.  (And if you have a capital loss you may write off some of it.)

We don't know her tax situation (i.e., C Corp, S Corp, Partnership, other factors, etc.) so we can't say for sure what her tax rate is. From what I can gather about her, I wouldn't be surprised if there's other funky crap in regards to this too.

My advice, talk to your tax preparer to find out about your situation. If you don't have one, find one. You don't want to pay more in taxes if you don't have to.

[tloonya]

Sept 19, 2015 17:40:17 GMT -5 phil5185 said:

For most sales, the federal rate for 2015 is 15% of your profit.  (And if you have a capital loss you may write off some of it.)

We didn't have profit last year.

We took business loans. But 2014 tax return is showing $486K in total sales.

This year there were no salaries. Just business loans. To survive.

Well...kill me now!

[Ombud]

TALK TO YOUR CPA IF YOU MIGHT HAVE A PROFIT (carryover losses exceed profit from selling) .... don't screw it up. Free advice is worth exactly what you pay for it

[tloonya]

Sept 20, 2015 16:11:38 GMT -5 Ombud said:

TALK TO YOUR CPA IF YOU MIGHT HAVE A PROFIT (carryover losses exceed profit from selling) .... don't screw it up. Free advice is worth exactly what you pay for it

WILL do tomorrow. Just wanted to talk to you guys.

[Ombud]

Congrats on selling and onto the next chapter in your working life

[tloonya]

Sept 20, 2015 16:11:38 GMT -5 Ombud said:

TALK TO YOUR CPA IF YOU MIGHT HAVE A PROFIT (carryover losses exceed profit from selling) .... don't screw it up. Free advice is worth exactly what you pay for it

My accountant is not available until Thursday!
He is coming with verbal offer tomorrow. What am I supposed to do?

[The Captain]

Was your business incorporated?

Are you selling the assets of the store, or the stock of the business (do the business loans get sold with the business)?

Do you know what your basis is in your business (how much capital/cash) you've put into it.

We don't have enough information to give you good guidance right now.  It's entirely possible you will have a loss on the sale of the business.

Verbal offers are a starting point for negotiations.  Wait and don't do anything until you talk to your accountant.

[tloonya]

Was your business incorporated?

YES!

Are you selling the assets of the store, or the stock of the business (do the business loans get sold with the business)?

Its a small store. We sell everything for asking price. No loans.

Do you know what your basis is in your business (how much capital/cash) you've put into it.

This language is beyond my understanding, sorry.


Verbal offers are a starting point for negotiations. Wait and don't do anything until you talk to your accountant.

Is it illegal to do this without the broker who found a buyer.
We aren't DOING anything just talking...

[tloonya]

Sept 21, 2015 13:28:40 GMT -5 The Captain said:

 It's entirely possible you will have a loss on the sale of the business.

 WHAT

[The Captain]

Sept 21, 2015 13:43:44 GMT -5 tloonya said:

Sept 21, 2015 13:28:40 GMT -5 The Captain said:

 It's entirely possible you will have a loss on the sale of the business.

 WHAT

You say the business is incorporated.  Here's an example.  Let's assume you started with zero.  You didn't buy the grocery store from anyone else.

You spend $600 to incorporate, then you have to buy inventory for the store.  Let's say you paid $80K for your current inventory.  You purchased store fixtures for $15K and coolers/Freezers for $5K.  Add another $5K for a cash register and sales tracking system and you have now put a total of $105,600 of your own money into the store.  That is the basis (roughly speaking).

If the buyer is only offering $98K you will have a loss on the sale.  You spent $105,600, sell for $98K, thus a loss of $7,600.  It's (of course) more complicated than that but this should give you an idea.

This is why good records and an accountant are needed.

[tloonya]

WOW, Captain, it is really great explanation.
I appreciate it.

So I am have to gather all the expenses for 6 years?
Or I am assuming my accountant is having it in my business tax return?

Also what is we have invested 401K in the business? Dos this count as well?

[rangerj]

If you are selling the assets then section 1060 of the tax code provides that each asset gets it share of the selling price based upon its fair market value as a percentage of the total fair market values. Then the selling price allocated to the asset is compared to the assets adjusted basis in order to determine the gain or loss on the sale of the asset. Any assumption of liabilities by the buyer is treated as if it is cash received from the buyer. To the extent depreciation recapture applies that part of a gain is treated as ordinary and not capital gain. The OP should have a CPA and/or tax attorney involved in this transaction.

[TheOtherMe]

Sept 25, 2015 19:13:14 GMT -5 rangerj said:

The OP should have a CPA and/or tax attorney involved in this transaction.

Definitely.  Too much room for major errors if OP tries to DIY.

[tloonya]

Sept 21, 2015 14:04:23 GMT -5 The Captain said:

Sept 21, 2015 13:43:44 GMT -5 tloonya said:

 WHAT

You say the business is incorporated.  Here's an example.  Let's assume you started with zero.  You didn't buy the grocery store from anyone else.

You spend $600 to incorporate, then you have to buy inventory for the store.  Let's say you paid $80K for your current inventory.  You purchased store fixtures for $15K and coolers/Freezers for $5K.  Add another $5K for a cash register and sales tracking system and you have now put a total of $105,600 of your own money into the store.  That is the basis (roughly speaking).

If the buyer is only offering $98K you will have a loss on the sale.  You spent $105,600, sell for $98K, thus a loss of $7,600.  It's (of course) more complicated than that but this should give you an idea.

This is why good records and an accountant are needed.

Actually my accountant said that everything I had ever invested into my business had been written off already.

[rangerj]

Added note: Inventory is not a capital asset, by statutory definition (tax code). The sale of inventory results in an ordinary gain or loss, NOT a capital gain or loss. Also note that the sales of assets are made by the corporation, and it reports the gain or loss and subsequently liquidates and the shareholders determine their gain or loss based upon the liquidating distributions.

[TheOtherMe]

Do the buyer and seller still have to complete Form 8594, so the sale of assets are treated the same on both sides of the transaction?

[rangerj]

If the memory serves me right the regulations in section 1.1060 still require that the buyer and seller's treatment be the same. Note that selling the assets at fair market value generally gets the buyer a "step-up in basis" to FMV. The distribution of the purchase price based upon FMV is intended to prevent the buyer from allocating the bulk of the purchase price to short term lived assets or otherwise manipulation of the allocation, e.g. land is not depreciable so little would ever be allocated to land unless there was an advantage to do so. Section 338(h)(10) IIRC provides the alternative of a stock sale "treated" as an asset sale, but the result should be the same to a large degree and the two parties also have to agree to the same treatment of the items sold/purchased.