Free Trial: TheSiteFactory.com

Sale of business. Buyer assumes accrued vacation.

Technical topics regarding tax preparation.
#1
Wiles  
Posts:
4060
Joined:
21-Apr-2014 9:42am
Location:
Bay Area – CA
Cash basis S-Corporation sells it's assets. Buyer also assumes liabilities, which include accrued vacation pay. The assumption of liabilities reduces the sale price.

Does the seller get to claim an ordinary deduction for the reduced sales price attributable to that vacation pay?

Or is this the buyer's ordinary deduction when this is eventually paid? And, therefore, the seller will reduce their capital gain by the accrued vacation pay reduction.

This discussion touches on it, but it is more about contingent liabilities:
viewtopic.php?f=8&t=16530
Last edited by Wiles on 5-Aug-2021 9:51pm, edited 1 time in total.
 

#2
Posts:
4722
Joined:
21-Apr-2014 7:21am
Location:
The Land
See the Commercial Security Bank case and TAM 8939002.

With that said, I think you might have trouble with this one, only because of the nature of the obligation.

It would probably make more sense for your seller client to pay out this obligation before the transaction closes. If the sale is going to produce cap gains at a 20% long-term federal rate, and he’s in the 37% ordinary bracket, then your client can get an arbitrage in tax rates. Let’s say client has $100k of cash, $100k of stock basis, $0 basis in assets to be sold and $100k of “accrued” vacation pay.

Scenario #1: If buyer assumes that $100k cash basis liability and agrees to pay $4.9m (instead of $5m), client will have a $4.9m cap gain. Net taxable income is also $4.9m. He’ll also have $5m in cash (the $4.9m + $100k existing).

Scenario #2: If buyer does not assume that liability and agrees to pay $5m instead, client will have a $5m cap gain. Client will then pay, and deduct, the $100k accrued vacation pay. Net taxable income is $4.9m, just like Scenario #1. Also like Scenario #1, client ends up with $5m in cash (the $5m + $100k existing - $100k vacation pay payment).

Not sure how the FICA will pan out and how that’s been considered in the calculating of the obligation. But worst case, that’s only 7.65% max. Further, if these people are the same ones getting the phantom payouts (from your other thread), those folks will be over the wage base.
 

#3
sjrcpa  
Posts:
3727
Joined:
23-Apr-2014 5:27pm
Location:
Maryland
Why isn't the assumption of the $100K liability by buyer additional sales price for seller?
 

#4
Wiles  
Posts:
4060
Joined:
21-Apr-2014 9:42am
Location:
Bay Area – CA
Sure. For presentation purposes, the $4.9m cash paid + $100K assumption of debt will be presented as a $5m asset sales price. After debiting and crediting and inputting on the tax return, you end up with a $4.9m capital gain.

Thank you, Jeff.
 

#5
Wiles  
Posts:
4060
Joined:
21-Apr-2014 9:42am
Location:
Bay Area – CA
This question in the OP addresses the assumption of accrued vacation for a cash basis taxpayer. However, the same would be true for an accrual basis taxpayer due to the 2 1/2 month rule. Correct?
 


Return to Taxation



Who is online

Users browsing this forum: BerkshireCPA, BigJohnNJEA, CaptCook, CLETaxLawyer, HowardS, ItDepends, JR1, lckent, Nilodop, rkrcpa, sjrcpa, Webster, Wiles and 76 guests