Are You Closing Your
Business?
Things you should know before closing your doors
If you are planning on
selling your business, there are a few things you should know that will
impact your tax preparation. In most
cases, the sale of a business is not the sale of one asset, but several
asset sales.
When sold, these assets must be classified as capital assets, depreciable
property used in the business, real property used in the business, or
property held for sale to customers, such as inventory or stock in trade.
The sale of capital assets results in capital gain or loss. The sale of
inventory results in ordinary income or loss. The gain or loss from the
sale of real property or depreciable property can be treated in a variety
of ways. The sale of your assets may result in a taxable gain even if they
are not worth much at the time of the sale. This is because the
depreciation you deducted while you had them in use is subject to
recapture and is taxable as ordinary income.
The buyer and seller
of a business must agree as to how the purchase price of the business is
to be allocated among all the assets that are sold. This allows the seller
to properly report the gain and the buyer to properly establish the basis
for depreciation to be taken during their tax prepration for the year.
If your business is incorporated, there are a couple of options you might
consider. You can sell the assets of the corporation, or you can sell the
stock. You might want to consider the advantages of selling your stock in
the corporation as opposed to selling the assets. If you are the original
shareholder of the corporation, and you received stock for your
contribution of the assets to the corporation, your stock may qualify as
§1244 stock.
The advantage of
§1244 stock is that, if you are selling your stock for less than your
basis, you will be allowed to deduct up to $50,000 ($100,000 if you file a
joint return) of the loss in one year. It will qualify as an ordinary
loss. Capital losses in excess of your capital gains are only allowed at
$3,000 per year. If the loss you take from the sale of your stock is
greater than your total income, you may have a net operating loss,
allowing you to carry the loss back to the two or five prior tax years.
