Gain or Loss on Sale of an S-Corp

 

Tax on Gain/loss on Sale of an S-Corp

S-Corp has no federal taxes on its own, the ordinary income/gains flows through to the shareholders. Same way the profit or loss from sale of a business also flows through to the shareholders. The gain or loss on sale of a business is generally capital gain or loss.

The gain or loss is computed by stock-basis of the shareholders from the price you paid for the business. Loss from sale is capital loss and only offset against capital gains and only $3000 can be deducted from other income on personal tax form 1040.

“More the stock basis less the gain, less the stock basis more the gain”

Buyer has no tax liabilities on purchase of a business.

There are two ways you can structure your sale of a business

     1.      Sell your company

    2.      Sell company’s assets only

When you sell your company, you calculate income by the money you received for your business less your basis in the S-corp. You can deduct selling expenses also. Net sale is Gross sale minus expenses. Capital gains are taxes at a lower rate so sale of a business will have lower taxes than the other ordinary/business income.

When you sell assets individually, keeping the company alive and close it after all the deals were done, there is a chance that you will be hit with depreciation recapture gains, that will put your to ordinary tax rates on some gains. Ordinary income tax rate is much higher than the capital gain.

For seller it is always better to sell the company as a single unit. However buyer prefers to buy assets if possible rather than the company so that they can take higher asset value for depreciation. Buying a company can put the buyer in the shoes of seller, so past tax dues and other liability may hit buyer after the purchase. Likewise, the unemployment taxes and other tax rates may pass to the buyer at the higher rate due to continuation of the old company.

Goodwill: What is goodwill?

Goodwill is an intangible asset. It is the value of business more than its assets at its Fair Market Value. Goodwill is the difference between the purchase price and the total sum of assets less liabilities acquired by the buyer of the company.

Buyer will be more interested in buying assets for depreciation, while buying company will put the depreciation on hold for longer period. Goodwill can be written off, but in about 15 years  While other assets can be written off immediately or within shorter period of time of 3, 5 and 7 years.

How do you value your goodwill and Assets Value on Buy-out?

Compute Fair Market Value of the assets on buy-out by comparing value of similar assets in the market. You might ask quotations from different vendors. If the assets are of rare or tailor-made, hire a professional asset valuator. Once you arrive at value of total assets you acquired with the acquisition of business, deduct the total price paid from the total value of the assets. You will arrive at goodwill value.

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