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Client selling their business

Technical topics regarding tax preparation.
#1
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I need a little advice on this - my client just called to say they have a non-binding offer on their business of $2.25 million and it is for a stock sale. I haven't seen anything yet and she will provide me with a copy of the paperwork later today. The stock sale surprises me because they have about $250,000 of assets that would be depreciable to a new owner and are almost fully depreciated on my client's books plus all the ancillary assets that would be sold in an asset sale but have been expensed. The question I have now is whether a stock sale or an asset sale is better for my client. I haven't worked with a stock sale in the past, other clients who have sold their businesses have done so as an asset sale. I need to get into this more, but what should I be looking for? How do I answer the question of which sale works best for my client?
 

#2
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It's probably safe to say a stock sale works better for your client.

The moment it's not a stock sale means your client gets ordinary income out of the deal...that can't be better than LTCG.
~Captcook
 

#3
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Sellers always want stock sales. Buyers always want assets.
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Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
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#4
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I haven't worked with a stock sale in the past

You haven’t? You’ve never had a client sell a share of IBM or Cisco?
 

#5
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The Stock sale could indeed be much more beneficial... IRC Sec 1202 could apply possibly - reducing the Federal tax on the gain to 0%...
 

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Jeff, of course, I've had clients sell the type of stock you question, but I've never had one sell their business as a stock sale.

Any suggestions for reading material beyond the Tax Book? I need to become more aware of how this is going to work, what will be subject to GE Tax in Hawaii, if any. What about things like a Covenant Not to Compete?
 

#7
MWPXYZ  
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Hopefully they are offering cash for the stock and not a note.

If your client is to obtain a note instead of all cash; then "due diligence" on the buyer should be done to make sure the odds of payment are good. Same, if the deal turns out to be stock for stock.
 

#8
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I just read an article on Sec 1202. That would be a good choice except this is and always has been an S corporation, started in 2009. I don't expect my client to carry back a note, she's been very clear that they want an all cash deal. When you mention "stock for stock", I'm assuming that is "I'll buy all of your stock and pay for it with some of the stock in my business." If that is essentially correct, I don't see that happening either. Thanks BTW, for offering help in this and any comments that direct me to more information are greatly appreciated.
 

#9
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Jeff, of course, I've had clients sell the type of stock you question, but I've never had one sell their business as a stock sale.


I figured the light bulb would go on with my comment, but I guess it didn’t. Here, let me help: The sale of 1 share of IBM isn’t a lot different than the sale of 100% of Smallco stock. The ownership of the shares simply changes. Proceeds minus basis equals gain. We have holding period in both situations too. The only thing that would make it different, with respect to a straight-up stock sale, is if something like Sec 1202 were at play, as Synchros’ notes. And any financing arrangement is just that and doesn’t really impact the tax theory/gain calc.

I need to become more aware of how this is going to work, what will be subject to GE Tax in Hawaii, if any.


That is a state-specific question, so you’ll have to figure that out on your own. Seems like the answer should be pretty easy to find. Are gains from stock sales subject to tax or not?

What about things like a Covenant Not to Compete?


Ordinary income, not subject to SE tax. And if he agrees to a consulting agreement, that would go on Schedule C and he’d make a SEP contribution.
 

#10
MWPXYZ  
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As an alternative to 1202, maybe reinvestment in an Opportunity Zone would be of interest to your client. There is a deadline to consider for reinvestment.
 

#11
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Can we discuss Qualifed Opportuity Zone (Funds). From one article I've read so far, it seems as though a corporation or partnership can start their own QOZ by investing in certain areas designated by IRS as underpriviledged, within certain parameters, and by filing form 8996 with their tax return. Would a married couple qualify as a partnership for this? Can they create a corporation specifically for the QOZ? Are there funds already established with something like Vanguard or TD Ameritrade or Edward Jones? What are some of the pros and cons to them. My clients are mid 50's, so it might be a good option for avoiding tax on some of the proceeds of this sale by investing in a QOZ and leaving the funds there for ten to 15 years.
 


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