.net barcode sdk Selling Your Business: Tax Considerations and Strategies in Software

Paint QR Code in Software Selling Your Business: Tax Considerations and Strategies

CHAPTER 14 Selling Your Business: Tax Considerations and Strategies
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determined by reference to the decedent s estate tax return) If an owner of stock acquired the stock in different blocks for different prices, and certain but not all of the shares are subsequently sold, the adjusted tax basis of the specific shares sold must be used to compute taxable gain or tax loss This is known as specific identification and should be used to save taxes on a sale of shares by selling the shares with the highest adjusted tax basis unless the seller has other losses available to offset the gain from a sale of lower-basis shares The adjusted tax basis of a share in an S corporation a corporation with respect to which an election is in effect to be governed by the provisions of Subchapter S of the Code and an interest in a partnership or a limited liability company (LLC) each a pass-through entity is generally what the owner paid for the share or interest plus (1) the income and gains allocated to the owner from the entity with respect to the share or interest and (2) any contributions by the owner to the entity with respect to the share or interest, less (3) tax losses allocated to the owner from the entity with respect to the share or interest and (4) any distributions from the entity to the owner with respect to the share or interest2
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Character of Gains and Losses: Ordinary vs Capital
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The character of a taxable gain or a tax loss can and usually does affect the amount of tax due upon sale of an asset or assets, often materially By character of taxable gain, I mean whether the gain is classified as so-called ordinary income under federal income tax law, which is usually subject to the maximum rate of tax, or as capital gain, which occurs when the gain
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Technically, the basis of an interest in a partnership or an LLC includes the holder s allocable share of the entity s indebtedness; however, the amount realized on a sale of such an interest also includes the holder s allocable share of the entity s indebtedness, so I have chosen to simply ignore a holder s allocable share of entity debt, since it generally will not affect the taxable gain or tax loss computation The only exception is if the holder has a negative tax basis capital account, in which case he or she will have a gain on a sale of the interest equal to the amount realized (without regard to his or her share of the entity debt) plus the amount of the negative tax basis capital account
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PART TWO The Sale and Financing of a Business
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derives from sale of an asset considered a capital asset under Code Section 1221 or Code Section 1235 (which sets forth special rules for patents) When a capital asset has been held for more than one year, it is a long-term capital gain and qualifies for taxation at a much lower federal tax rate (currently, less than half what is applicable to ordinary income) If a taxable gain derives from a capital asset held for less than one year, it is a short-term capital gain, which is generally taxed like ordinary income3 The character of tax loss under federal income tax law is also important, but unlike taxable gains, it is generally better for tax losses to be ordinary in nature than capital Ordinary tax losses may be offset against both ordinary income and capital gains If during a taxable year ordinary tax losses exceed all income and gains against which they may be offset, the excess ordinary tax losses may generally be carried back to certain prior years returns (and refunds of taxes paid in those years sought), and then carried forward to certain future years for offset against income and gains earned in those years Capital losses, on the other hand, may only be offset against capital gains, and only up to a very limited amount of ordinary income Excess capital losses may generally be carried forward The rules covered in this paragraph are sometimes referred to as the netting rules The key, then, is that if a transaction will result in taxable gain, the seller should generally endeavor to maximize the amount that will be characterized as long-term capital gain; but if the transaction will result in a tax loss, the seller should generally endeavor to maximize the amount that will be characterized as ordinary loss There are a number of strategies for achieving the above italicized objectives, including an agreement between seller and buyer as to an allocation of the sales price in a way that, within
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Assets that have been held for more than one year and are depreciable are so-called Section 1231 assets Gain on sale of a Section 1231 asset is ordinary income to the extent of certain prior depreciation deductions claimed and thereafter is long-term capital gain Loss on sale of a Section 1231 asset is an ordinary loss
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