Free Trial: TheSiteFactory.com

Sometimes there's not much you can do to save them taxes

Technical topics regarding tax preparation.
#1
Posts:
1199
Joined:
21-Apr-2014 12:31pm
Location:
HAWAII
I have a client who is selling their business in town. They started it about ten years ago, have worked very hard and it is very successful. They are burned out They are listing it for sale and it will sell in the range of $2.5 million. I've run some preliminary tax number for them based on what they have indicated are their wishes. Biggest desire is to not be the bank, all cash deal or no deal. Result will be at least a quarter of a million or more in taxes the year of the sale. I tried talking to them about the possibility of carrying a note and to explain that it would spread out their gain and tax liability over a period of time at a lower tax rate. It's like telling a brick wall the same thing. They just want out, and with no possibility of ending up with the business back in their lap because the new owner defaults. She was talking about a potential buyer who wants to buy their name as well, asked if they were talking about doing a stock sale as opposed to an asset sale. She's completely closed to even hearing what the difference is. "That's the other guys problem" and no further discussion.

I worked so hard on the sale of another client last year and their tax return, not nearly in the range of these numbers, and just kept asking myself if I had done enough to help them keep the taxes down, and making sure everything was in order with the tax returns. It's kind of amazing to be in this situation where someone is willing to put that much on the table for taxes and not at all interested in learning about alternatives that would save some of that money.
 

#2
Chay  
Posts:
810
Joined:
22-Jun-2018 1:21pm
Location:
Virginia
How about $1.25M on December 31 and another $1.25M on January 1? Will the client's other income in 2020 be low enough that significant gains would escape the 20% bracket?
 

#3
Posts:
79
Joined:
23-Jan-2015 11:10pm
Location:
michigan
Am I missing something? Taxes of potentially as low as $250,000 seems very low to me if there is a selling price of $2.5 million. A large stock basis could explain this. Is this the case?
 

#4
Posts:
1609
Joined:
24-Apr-2014 7:54am
Location:
Wisconsin
I can sympathize with the client being burned out and looking for a way out, and not caring about the details right now.

You can lead a horse to water but you can't make it drink. However, I would document your water... and make contemporaneous notes of the discussions you had with the clients. In a couple years, they might have regrets.
 

#5
Andrew  
Posts:
140
Joined:
21-Nov-2018 5:00pm
Location:
CA
I agree with missingdonut. Have the client sign a letter that tells them how much tax is estimated to be owed. And have 'em sign off on "no interest in installment sale". I have a client who wants to retire and sell or phase out his business. Same "talking to brick wall" experience. Client told me he's lost interest in his business. And apparently is also not interested in learning the tax consequences of either option so that he can make an informed decision. There's a lot of research out there that says we humans don't make decisions rationally. Seems true.
 

#6
makbo  
Posts:
6423
Joined:
23-Apr-2014 3:44pm
Location:
District 13
What would be the amount of estimated tax savings by spreading the income over two years instead of one? Other than the time value of money (not much these days), is it really significant?
 

#7
Posts:
3437
Joined:
21-Apr-2014 7:21am
Location:
The Land
What would be the amount of estimated tax savings by spreading the income over two years instead of one?


Yeah, and the tax consequence becomes pretty immaterial when you go the installment sale route and end up not getting paid. But I get the 2-day installment sale – one payment on 12/31 and one on 1/1. But to advise a client to take payments over a period of years, just to save on taxes, with respect to a bad asset to foreclose upon (the business), isn’t a real good idea. If there are solid personal guarantees and/or solid collateral, then that changes the calculus. Without these things, you get your tax savings, but at a pretty steep price – risk of non-payment (and everything that comes along with that). Normally, you don’t want to sell a business using more than 15-20% seller financing when your only recourse is to foreclose on the business.
 

#8
JR1  
Posts:
2606
Joined:
21-Apr-2014 9:31am
Location:
Western 'burbs of Chicago
Esp. if depreciation recapture is involved. In many cases I've been involved in, that's been the biggest piece, making an installment sale moot.

And I agree that walking witout having to worry over repo is worth a ton. Pay the tax and be happy.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#9
Posts:
1609
Joined:
24-Apr-2014 7:54am
Location:
Wisconsin
Jeff-Ohio wrote:But to advise a client to take payments over a period of years, just to save on taxes, with respect to a bad asset to foreclose upon (the business), isn’t a real good idea.


Oh, absolutely. Better to have cash in hand and have a related tax expense than to have neither.

But it's still a consideration that needs to be brought up with the client. And other details such as the asset sale vs stock sale that actionbsns mentioned, or to make sure that the $2.5 million sale price is in cold hard cash rather than in restricted stock of the buyer. The tax considerations exist but are only part of the picture, and in three years' time when the client is no longer desperate to quit, there might be different feelings.
 

#10
lucyko  
Posts:
596
Joined:
27-Jul-2014 10:19pm
Location:
Orange County,CA
Discuss with your client the possibility of seeing a top notch financial planner for advice. (should be fee based only Financial Planner ) There are other strategies available besides an installment sale .
 

#11
Wiles  
Posts:
3002
Joined:
21-Apr-2014 9:42am
Location:
Bay Area - CA
Monetized installment sale?
 

#12
Nilodop  
Posts:
11698
Joined:
21-Apr-2014 9:28am
Location:
Pennsylvania
But I get the 2-day installment sale – one payment on 12/31 and one on 1/1. Since such a deal would almost certainly be suggested by the seller in a situation where the buyer is ready and willing to close for cash on 12/31, I wonder if section 7701(o) might be successfully asserted by IRS,, possibly along with constructive receipt to push the whole transaction into 12/31. All the rulings and cases looked at upheld installment treatment, and certainly the seller can structure a deal so as to get him a favorable tax result, but still, none of those cases and rulings had that fact pattern, so I just wonder. And it would screw up my plans for the holiday, not to mention getting a lawyer and title company etc to be available.
 


Return to Taxation



Who is online

Users browsing this forum: CO CPA, DavidG, dellpaul, JAD, Jeff-Ohio, Keyad22, ManVsTax, Michaelstar, MSchmahl, nancyaeo, wwwcpa1biz and 139 guests