Sale of business


S

Sgt. Sausage

Question from my parents who, somehow, have managed
to not figure out how usenet works for the last
decade or so <grin>. Dad's ready to retire and
has found a buyer for his business.

Scenario is as follows: Service oriented business
is operating as sole proprietorship. Retirement time
comes along and time to "cash out" so to speak. Buyer
willing to pay one-time lump sum of, say, $250,000.00
to purchase the business.

If the sale goes through as described -- bought and
paid for in single lump sum, then what are the tax
implications for the seller? He's now got a $250K
windfall that's going to be taxed somehow. I just
don't know how.

What kind of income is this? Is this ordinary, earned
income for the seller? It's a service business, theres
not a lot of "hard" assets -- minimal, maybe $25,000
in computers, phones, cubicles, office furniture/supplies
etc.

How would this be taxed for the seller? Would the seller
show the entire $250,000 as ordinary earned income?

Assuming the $250,000 would bump up the taxes by
a bracket or two -- would it be beneficial (from
a tax standpoint) to, say, take the $250K over the
next 10 years in payments of 25K, if that saves a
few percentage points by staying in a lower tax
bracket?

I know, I know -- the whole "bird in hand". Seller
would like to have all money up front (who knows
what buyer's finances will be like over the
next 10 years) -- but purely from a tax standpoint:

(a) how will it be taxed
(b) is there any benefit to up front, lump
sum -vs- installments over next 10 years?

Thanks in advance.
 
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S

Stuart A. Bronstein

Sgt. Sausage said:
Question from my parents who, somehow, have managed
to not figure out how usenet works for the last
decade or so <grin>. Dad's ready to retire and
has found a buyer for his business.

Scenario is as follows: Service oriented business
is operating as sole proprietorship. Retirement time
comes along and time to "cash out" so to speak. Buyer
willing to pay one-time lump sum of, say, $250,000.00
to purchase the business.

If the sale goes through as described -- bought and
paid for in single lump sum, then what are the tax
implications for the seller? He's now got a $250K
windfall that's going to be taxed somehow. I just
don't know how.
It depends on a lot of factors. When that much money is
involved, you really should talk to a local accounting
professional.

The problem is that the sale is not just the sale of the
business. It has different kinds of assets, and they are
treated differently for tax purposes.

For example, he may be selling the time left on his lease.
He's probably selling his customer list. Then there is good
will, equipment and inventory. They all might be treated
differently for tax purposes. And the buyer's interest and
the seller's interest in this matter are not the same.

Stu
 
T

Thomas Healy

Sgt. Sausage said:
Question from my parents who, somehow, have managed
to not figure out how usenet works for the last
decade or so <grin>. Dad's ready to retire and
has found a buyer for his business.

Scenario is as follows: Service oriented business
is operating as sole proprietorship. Retirement time
comes along and time to "cash out" so to speak. Buyer
willing to pay one-time lump sum of, say, $250,000.00
to purchase the business.

If the sale goes through as described -- bought and
paid for in single lump sum, then what are the tax
implications for the seller? He's now got a $250K
windfall that's going to be taxed somehow. I just
don't know how.
There could be a little bit of ordinary income due to
recapture of depreciation on the equipment - Section 1245
gain. Most of the rest is likely to be for the sale of
goodwill which is Section 1231 gain, effectively capital
gain. Depending on negotiations, some could be for a
covenant not to compete, which would be ordinary income.

So most of it will be capital gain, with a maximum federal
rate of 15%; typically states don't have a special rate for
capital gains, so the full state rate is likely to apply.

Chances are that Dad is better off getting all the money up
front, both for tax purposes and for "bird in the hand"
purposes. The reason is that with an installment sale he
will likely be subject to full tax on social security for
several years, while having it all in one year means that if
his income in subsequent years is low enough, some of the
social security could escape tax.
 
H

Harlan Lunsford

Sgt. Sausage said:
Question from my parents who, somehow, have managed
to not figure out how usenet works for the last
decade or so <grin>. Dad's ready to retire and
has found a buyer for his business.

Scenario is as follows: Service oriented business
is operating as sole proprietorship. Retirement time
comes along and time to "cash out" so to speak. Buyer
willing to pay one-time lump sum of, say, $250,000.00
to purchase the business.

If the sale goes through as described -- bought and
paid for in single lump sum, then what are the tax
implications for the seller? He's now got a $250K
windfall that's going to be taxed somehow. I just
don't know how.

What kind of income is this? Is this ordinary, earned
income for the seller? It's a service business, theres
not a lot of "hard" assets -- minimal, maybe $25,000
in computers, phones, cubicles, office furniture/supplies
etc.

How would this be taxed for the seller? Would the seller
show the entire $250,000 as ordinary earned income?

Assuming the $250,000 would bump up the taxes by
a bracket or two -- would it be beneficial (from
a tax standpoint) to, say, take the $250K over the
next 10 years in payments of 25K, if that saves a
few percentage points by staying in a lower tax
bracket?

I know, I know -- the whole "bird in hand". Seller
would like to have all money up front (who knows
what buyer's finances will be like over the
next 10 years) -- but purely from a tax standpoint:

(a) how will it be taxed
The answer is...... It depends!
No, not a flippant response, but one that points up the fact
that buyer and seller agree on the nature and breakdown of
the total price. Sounds like your dad needs some local and
competent tax advice.
(b) is there any benefit to up front, lump
sum -vs- installments over next 10 years?
Sounds like an installment sale would be of benefit, but
ONCE again, get some local advice.

ChEAr$,
Harlan Lunsford, EA n LA
Fri 18 Feb 2005
 
D

David Woods, EA, ChFC, CLU

Sgt. Sausage said:
Question from my parents who, somehow, have managed
to not figure out how usenet works for the last
decade or so <grin>. Dad's ready to retire and
has found a buyer for his business.

Scenario is as follows: Service oriented business
is operating as sole proprietorship. Retirement time
comes along and time to "cash out" so to speak. Buyer
willing to pay one-time lump sum of, say, $250,000.00
to purchase the business.

If the sale goes through as described -- bought and
paid for in single lump sum, then what are the tax
implications for the seller? He's now got a $250K
windfall that's going to be taxed somehow. I just
don't know how.

What kind of income is this? Is this ordinary, earned
income for the seller? It's a service business, theres
not a lot of "hard" assets -- minimal, maybe $25,000
in computers, phones, cubicles, office furniture/supplies
etc.

How would this be taxed for the seller? Would the seller
show the entire $250,000 as ordinary earned income?

Assuming the $250,000 would bump up the taxes by
a bracket or two -- would it be beneficial (from
a tax standpoint) to, say, take the $250K over the
next 10 years in payments of 25K, if that saves a
few percentage points by staying in a lower tax
bracket?

I know, I know -- the whole "bird in hand". Seller
would like to have all money up front (who knows
what buyer's finances will be like over the
next 10 years) -- but purely from a tax standpoint:

(a) how will it be taxed
(b) is there any benefit to up front, lump
sum -vs- installments over next 10 years?
Your father is looking at a $250k deal. Tell him to spend a
few of those dollars on a quality tax advisor. You bring up
a couple of real issues, out of probably a dozen that apply.
 
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L

lesstax

the way it will be taxed depends on how you allocate the
sale price.

goodwill?
furniture fixtures & equipment
convenant not to compete

some of these allocations have distinct benefits to the
seller and some to the buyer.

consult with a local cpa that specializes in business
transactions. a referral might come from an escrow company
that specializes in bulk sale transfers.

the hawk
 
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