Tax Consequences of Selling or Buying a Business

Key Points to Consider

• You are only taxed if there is a gain on the sale or if income is earned
• Capital Gains tax rate is almost always lower than Ordinary Income tax rate
• Both the Seller and the Buyer are required to file form 8594 with the IRS disclosing how the assets of the business were transferred
• Buyers prefer asset sales, Sellers desire stock sales
• Buyers want to allocate as much of the purchase price to consulting agreements and highly depreciable assets such as equipment and vehicles
• Sellers want to allocate as much of the purchase price to goodwill and inventory

Corporate Stock

Most small business transactions are asset sales rather than stock sales. But on the rare occasion when stock is purchased it is treated as a capital gain for the Seller. The gain is calculated by figuring how much the original owners stock is worth (also called the basis) and subtracting that number from the price the Buyer is paying for the stock. You will need the help of your accountant to determine the basis and the gain.

Accounts Receivable

This asset may or may not be included in the sale of the business. Many times it is just as easy for the seller to retain the receivables and collect the accounts after closing. Other times the buyers may want the receivables to satisfy their working capital needs. AR is sometimes transferred for a loss if the buyer negotiates a discount arguing that some of the receivables will be uncollectable.

Inventory

This asset is normally sold to a buyer “at the Sellers Cost.” Therefore, no gain is realized by the seller for transferring this asset to a buyer. If the Seller decides to sell the inventory for more than they paid to acquire the inventory, then there will be a gain and the ordinary income tax rate will apply.