description of capital gains tax liability when selling your business

1. Sterling Accounting Group
407-581-6705
Your Due Diligence Specialists
I. Asset Allocation
II. Depreciation Recapture
III. Capital Gains

2. Please Contact Us
With Any Questions

3. Agreement between buyer and seller on how the purchase price
will be allocated for tax purposes
Purchase price for allocation – Cash plus liabilities assumed
(notes…)
Agreement to be signed by both buyer and seller
Closing agent/attorney usually furnishes
Asset Allocation

5. Asset classes
(Assume Asset Purchase)
Class Applies Tax Issue
Class I – Cash No
Class II – Marketable
Securities No
Class III – Accounts receivable No
Class IV – Inventory Yes Ordinary income
Class V - All other assets
Equipment Yes
Ordinary income
(recapture)/Capital Gains
Class VI – Goodwill Yes Capital gains
Buyer = Ordinary income = Inventory and equipment
Seller = Capital Gains = Goodwill

6. Rate Single Filers Married Joint Filers Head of Household
Filers
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to
$183,250
$146,400 to $223,050 $125,450 to $203,150
33% $183,250 to
$398,350
$223,050 to $398,350 $203,150 to $398,350
35% $398,350 to
$400,000
$398,350 to $450,000 $398,350 to $425,000
39.6% $400,000 and up $450,000 and up $425,000 and up

7. Prior Depreciation taken on equipment is taxed at regular (ordinary rates)
Recapture rate is sellers ordinary tax rate (25%, 28%, 33%..)
Loss of capital gain to the extent of prior depreciation
Significant on businesses with lots of equipment that has been fully depreciated
High recapture industry – Landscaping, Restaurants
Low recapture industry – Pool cleaning, Property management, Professional services
Have Seller Call Accountant
Depreciation Recapture
Summary

8. Depreciation Recapture Example

9. New Capital Gain and Ordinary
Tax Rate
2013 Tax rate changes
 New 39.6% tax rate for income over $450,000 (MFJ)
 Only applies to income over $450,000
Capital gain rate changes
 Increases to 20% for income over $450,000 (MFJ)
 If income over $450,000 – all capital gains subject to higher rate

10. Obama Care Investment Tax
Obama Care 3.8% investment tax
 Tax on investment income on income over $250,000 (MFJ)
 Capital gains, dividends, interest, passive partnership and S corp income
 If income over $250,000 all investment income subject to tax

11. Tax Strategy
Problem
 Year of sale, large increase in income could trigger all of these additional
taxes
Strategy
 Instalment sale – Spread gain over multiple years
 Seller pays tax as he collects payments. Could result in not hitting
higher tax rates
 Instalment notes may not be pledged as collateral
 Facilitate your deals with seller holding paper
 Advise seller to discuss tax situation with his CPA

12. Starting point of 39.6% rate
Filing Status 2013 2014
Married filing jointly
and surviving spouse $450,000 $457,600
Heads of households $425,000 $432,200
Unmarried
Individuals $400,000 $406,750
Married filing
Separately $225,000 $228,800

13. Long Term
Capital Gain Rates
Tax
Bracket
Income up
To
(MFJ)
Long Term
Capital
Gains Rate
Obama Care
Investment
Tax
Total
Rate
15% $72,500 0% 0% 0%
35% $450,000 15% 0% 15%
39.6% $450,000 and
up
20% 3.8% 23.8%