| The purpose of this article is to
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| | more favorable long-term capital gains
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| demonstrate the importance of the tax
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| | rate. For an asset sale a portion of the
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| impact in the sale of your business. As
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| | gains will be taxed at the less favorable
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| an M&A intermediary and member of the
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| | income tax rates. In the example above,
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| IBBA, International Business Brokers
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| | the seller's tax liability for the
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| Association, we recognize our
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| | machinery and equipment gain in an asset
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| responsibility to recommend that our
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| | sale would be 40% of the $625,000 gain or
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| clients use attorneys and tax accountants
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| | $250,000. In a stock sale the tax
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| for independent advice on transactions.As
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| | liability for the same gain associated
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| a general rule, buyers of businesses have
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| | with the machinery and equipment is 20%
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| already completed several transactions.
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| | of $625,000, or $125,000.The form of the
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| They have a process and are surrounded by
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| | seller's organization, for example C
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| a team of experienced mergers and
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| | Corp, S Corp, or LLC are important to
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| acquisitions professionals. Sellers on
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| | consider in a business sale. In a C Corp
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| the other hand, sell a business only one
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| | vs. an S Corp and LLC, the gains are
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| time. Their "team" consists of their
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| | subject to double taxation. In a C Corp
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| outside counsel who does general business
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| | sale the gain from the sale of assets is
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| law and their accountant who does their
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| | taxed at the corporate income tax rate.
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| books and tax filings. It is important
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| | The remaining proceeds are distributed to
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| to note that the seller's team may have
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| | the shareholders and the difference
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| little or no experience in a business
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| | between the liquidation proceeds and the
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| sale transaction.Another general rule is
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| | stockholder stock basis are taxed at the
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| that a deal structure that favors a buyer
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| | individual's long-term capital gains
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| from the tax perspective normally is
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| | rate.The gains have been taxed twice
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| detrimental to the seller's tax situation
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| | reducing the individual's after-tax
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| and vice versa. For example, in
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| | proceeds. An S Corp or LLC sale results
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| allocating the purchase price in an asset
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| | in gains being taxed only once using the
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| sale, the buyer wants the fastest
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| | tax profile of the individual
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| write-off possible. From a tax
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| | stockholder.Selling your business - tax
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| standpoint he would want to allocate as
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| | consideration checklist:1. Get good tax
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| much of the transaction value to a
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| | and legal counsel when you establish the
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| consulting contract for the seller and
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| | initial form of your business - C Corp, S
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| equipment with a short depreciation
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| | Corp, or LLC etc.2. If you establish a C
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| period.A consulting contract is taxed to
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| | Corp, retain ownership of all
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| the seller as earned income, generally
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| | appreciating assets outside of the
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| the highest possible tax rate. The
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| | corporation (land and buildings, patents,
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| difference between the depreciated tax
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| | trademarks, franchise rights). Note: in
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| basis of equipment and the amount of the
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| | a C Corp sale, there are no long-term
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| purchase price allocated is taxed to the
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| | capital gains tax rates only income tax
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| seller at the seller's ordinary income
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| | rates. Long-term capital gains can only
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| tax rate. This is generally the second
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| | offset long-term capital losses.
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| highest tax rate (no FICA due on this vs.
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| | Personal assets sales can have favorable
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| earned income). The seller would prefer
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| | long-term capital gains treatment and you
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| to have more of the purchase price
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| | avoid double taxation for these assets
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| allocated to goodwill, personal goodwill,
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| | with big gains.3. Look first at the
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| and going concern value.The seller would
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| | economics of the sales transaction and
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| be taxed at the more favorable individual
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| | secondly at the tax structure.4. Make
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| capital gains rates for gains in these
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| | sure your professional support team has
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| categories. An individual that was in
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| | deal making experience.5. Before you take
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| the 40% income tax bracket would pay
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| | your business to the market, work with
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| capital gains at a 20% rate. Note: an
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| | your professionals to understand your tax
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| asset sale of a business will normally
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| | characteristics and how various deal
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| put a seller into the highest income tax
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| | structures will impact the after-tax sale
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| bracket.The buyer's write-off period for
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| | proceeds6. Before you complete your sales
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| goodwill, personal goodwill, and going
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| | transaction work with a financial
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| concern value is fifteen years. This is
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| | planning or tax planning professional to
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| far less desirable than the one or two
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| | determine if there are strategies you can
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| years of expense "write-off" for a
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| | employ to defer or eliminate the payment
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| consulting agreement.Another very
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| | of taxes.7. Recognize that as a general
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| important issue for tax purposes is
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| | rule your desire to "cash out" and
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| whether the sale is a stock sale or an
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| | receive all proceeds from your sale
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| asset sale. Buyers generally prefer
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| | immediately will increase your tax
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| asset sales and sellers generally prefer
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| | liability.8. Get your professionals
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| stock sales. In an asset sale the buyer
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| | involved early and keep them involved in
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| gets to take a step-up in basis for
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| | analyzing various bids to determine your
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| machinery and equipment. Let's say that
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| | best offer.Again, the purpose of this
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| the seller's depreciated value for the
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| | article was not to offer you tax advice
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| machinery and equipment were $600,000.
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| | (which I am not qualified to do). It
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| FMV and purchase price allocation were
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| | was to alert you to the huge potential
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| $1.25 million.Under a stock sale the
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| | impact that the deal structure and taxes
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| buyer inherits the historical
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| | can have on the economics of your sales
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| depreciation structure for write-off. In
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| | transaction and the importance of
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| an asset sale the buyer establishes the
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| | involving the right legal and tax
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| $1.25 million (stepped up value) as his
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| | professionals.Dave Kauppi is a business
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| basis for depreciation and gets the
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| | broker and President of MidMarket
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| advantage of bigger write-offs for tax
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| | Capital. We help business owners with
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| purposes.The seller prefers a stock sale
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| | all aspects of Mergers and Acquisitions.
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| because the entire gain is taxed at the
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