Tax consequences liquidating corporation
The buyer wants as much money as possible to be allocated to items that are currently deductible, such as a consulting agreement, or to assets that can be depreciated quickly.
This will improve the business's cash flow by reducing its tax bill in the critical first years.
As the seller, you will probably want to allocate most, if not all, of the purchase price to the capital assets that were transferred with the business.
You want to do that because proceeds from the sale of a capital asset, including business property or your entire business, are taxed as capital gains.
Amounts paid under noncompete agreements are ordinary income to you and amortizable over 15 years by the buyer, unless the IRS successfully argues they are really part of the purchase price.
Amounts paid under consulting agreements are ordinary income to you and currently deductible to the buyer.
If you negotiate a total price for the business, you and the buyer must agree as to what portion of the purchase price applies to each individual asset, and to intangible assets such as goodwill.The seller, on the other hand, wants as much money as possible allocated to assets on which the gain is treated as capital gains, rather than to assets on which gain must be treated as ordinary income.The reason is that the tax rate on long-term capital gains for noncorporate taxpayers is much lower than the highest maximum individual tax rate.According to IRS rules, the buyer and seller must use the same allocation, so the allocation will have to be negotiated and put in writing as part of the sales contract.Apportioning the price between assets can be a big bone of contention.
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Given that most small business owners who are successful in selling their company are in high tax brackets, this rate differential is very important in reducing tax liability.