What becomes of losses in an escrow account?


J

john

When I sold my business 2 years ago a large part of the payment was put into
an escrow account to cover environmental remediation. I don't have to pay
income tax on that amount until I actually receive it when the remediation
is done and the account is liquidated. However I do have to pay income tax
on the account's income. (at least according to the accountant I used then;
but he was an idiot, so he might not have been right.)

In 2007 the account made money and I paid income tax on it. I am told that
when I receive money from the account I subtract the amount of income I
recognized in 2007 from the final income when figuring capital gains tax.
In 2008 it will lose money. Presumably the loss goes on my 2008 income tax
return, and I add it back in when the account liquidates.
Does that seem right?
 
Ad

Advertisements

P

Paul Thomas, CPA

john said:
When I sold my business 2 years ago a large part of the payment was put
into an escrow account to cover environmental remediation. I don't have
to pay income tax on that amount until I actually receive it when the
remediation is done and the account is liquidated. However I do have to
pay income tax on the account's income. (at least according to the
accountant I used then; but he was an idiot, so he might not have been
right.)

In 2007 the account made money and I paid income tax on it. I am told
that when I receive money from the account I subtract the amount of income
I recognized in 2007 from the final income when figuring capital gains
tax.
In 2008 it will lose money. Presumably the loss goes on my 2008 income
tax return, and I add it back in when the account liquidates.
Does that seem right?



Did you take a deduction - a business deduction maybe - on the amount you
put into the escrow account?

If so, then yes, it's income to you when you get it back.

What type of income it might be depends on if, how and where you took that
deduction.
 
S

Seth

Did you take a deduction - a business deduction maybe - on the amount you
put into the escrow account?
I think, rather, it was not considered income at the time.
If so, then yes, it's income to you when you get it back.

What type of income it might be depends on if, how and where you took that
deduction.
In which case, it would be capital gains when received.

Seth
 
J

john

Paul Thomas said:
Did you take a deduction - a business deduction maybe - on the amount you
put into the escrow account?

If so, then yes, it's income to you when you get it back.

What type of income it might be depends on if, how and where you took that
deduction.
I didn't put it into the escrow account, the purchasing company did. I
don't get it, or have any control over it, until the remediation is over.
Then I get what is left.
I also didn't pay any income tax on it, as I didn't recognize it as income.
I am told I have to pay capital gains on it (with a zero basis) on whatever
I eventually get, when I get it.

Assuming the above seems like it might be correct, my current question
concerns the loss the escrow account will show for 2008.
In 2007 it had a profit, and I entered them (dividends and capital gains) on
my income tax return. The accountant told me that I will subtract the 2007
from the amount I am ultimately paid when figuring how much capital gains to
pay on it.
In 2008 it has a loss. (dividends, but larger capital losses). My question
is: do I do pretty much the same as last year. Put it all on my 2008 income
tax return, but ADD the loss to the amount I ultimately receive when the
account liquidates.

Clear as mud, right?
 
P

Paul Thomas, CPA

john said:
I didn't put it into the escrow account, the purchasing company did. I
don't get it, or have any control over it, until the remediation is over.
Then I get what is left.
I also didn't pay any income tax on it, as I didn't recognize it as
income. I am told I have to pay capital gains on it (with a zero basis) on
whatever I eventually get, when I get it.


By not counting it as part of your sales price, then it's income when
received. Capital gains income, as it would have been treated in that
manner had you received the whole lump sum at closing.




Assuming the above seems like it might be correct, my current question
concerns the loss the escrow account will show for 2008.
In 2007 it had a profit, and I entered them (dividends and capital gains)
on my income tax return. The accountant told me that I will subtract the
2007 from the amount I am ultimately paid when figuring how much capital
gains to pay on it.
In 2008 it has a loss. (dividends, but larger capital losses). My
question is: do I do pretty much the same as last year. Put it all on my
2008 income tax return, but ADD the loss to the amount I ultimately
receive when the account liquidates.

Clear as mud, right?


I've been in some quite muddy waters, and no, you shouldn't get any
deduction for the losses in that account.

Why?

You don't own that account and more importantly, you have no basis in the
assets that lost value.





If we're talking some large sums here, and the escrow account is some
fraction of the total sales price, then you should be running this by your
accountant who is more knowledgeable of this transaction.
 
J

john

Paul Thomas said:
By not counting it as part of your sales price, then it's income when
received. Capital gains income, as it would have been treated in that
manner had you received the whole lump sum at closing.








I've been in some quite muddy waters, and no, you shouldn't get any
deduction for the losses in that account.

Why?

You don't own that account and more importantly, you have no basis in the
assets that lost value.





If we're talking some large sums here, and the escrow account is some
fraction of the total sales price, then you should be running this by your
accountant who is more knowledgeable of this transaction.
My accountant, in 2007, included the escrow account's income on my tax
return. He told me that the 2007 income would be subtracted from the
account balance for the purpose of determining capital gains when it was
liquidated.
I had previously consulted him, and a tax attorney, when drafting the escrow
agreement; so he was well familiar with it.

Unfortunately I no long have any confidence in him, so I have doubts about
how he handled my 2007 tax return.
 
Ad

Advertisements

R

removeps-groups

I've been in some quite muddy waters, and no, you shouldn't get any
deduction for the losses in that account.

Why?

You don't own that account and more importantly, you have no basis in the
assets that lost value.
Then why does he have to pay taxes in the income?
 

Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top