Leave Your Business to Your Family – Not the Government

Tax Attorneys at Ainer & Fraker, LLP Discuss Succession Strategies for the Family Held Business:

Successfully passing a family business to the family upon death of the owner is not an easy task. Most business owners fail to realize the importance of a sound business succession plan. As a result, only about half of all family businesses are transferred to the next generation. A significant number are forced to look elsewhere for capital and management expertise.

Without the benefits of a succession plan, grieving loved ones are forced into a business they know little about, which can adversely affect the financial stability of the business and the financial security of your family. Not only should management succession be addressed in the business succession plan, but transfer of ownership and estate planning issues should also be taken care of as well.

Choosing the successor is one of the biggest challenges in business succession planning. Appraise the individual’s strengths and weaknesses and ensure that the individual has the leadership skills and drive to meet the goals of the business. The needs of the business – not the desires of family members – should be your foremost consideration. It is imperative that a plan is developed in the early stages so that whomever you choose can benefit from your experience and knowledge.

Other crucial elements of a sound business succession plan include transfer of ownership and estate planning. Buy-sell agreements, stock gifting, trusts and wills are some of the ways to transfer ownership. Each of these means of transfer has specific legal and tax ramifications and should be considered in conjunction with proper estate planning.

Please Contact a Tax Attorney at Ainer & Fraker, LLP for assistance with your family’s business succession plan.

Don’t Overlook Form 8594 When Buying or Selling a Business

Tax Attorneys at Ainer & Fraker, LLP Discuss the Use of IRS Form 8594 When Buying or Selling a Business:

Most businesses are made up of different types of assets, and those assets get different treatment for tax purposes. How those items are identified at the time of the sale/purchase can have a significant tax impact on both the buyer and the seller. A seller will, of course, want to designate items into classes that will yield a long-term capital gain on sale and thus provide the best tax result from the sale, whereas the buyer will generally want to designate the purchased items into classes that provide the biggest up-front write-offs.

The IRS generally does not care how the class allocations are made so long as both the buyer and the seller use consistent treatment. That is where IRS Form 8594 comes in. The form allocates the entire purchase/sale price of the business into the various classes of assets; both the buyer and the seller are required to file the form with their tax returns. It is also very important that allocations be spelled out in the sale/purchase agreement and that the treatment between the buyer and seller is consistent.

Generally, assets are divided into the seven categories very briefly described below:

Class I – Cash and Bank Deposits
Class IIActively Traded Personal Property & Certificates of Deposit
Class IIIDebt Instruments
Class IVStock in Trade (Inventory)
Class VFurniture, Fixtures, Vehicles, etc.
Class VIIntangibles (Including Covenant Not to Compete)
Class VIIGoodwill of a Going Concern

A seller would prefer to designate the major portion of the sales price to goodwill and minimize any allocation to furnishings and equipment.

Why, you ask?

Because goodwill is a capital asset, the sale of which for Federal purposes will be taxed at a maximum rate of 20% in 2013, while furnishings and equipment can be taxed as high as 39.6 percent. On the other hand, the buyer would prefer to have as much as possible designated as furnishings and equipment, since they can be expensed or written off over a short period of time (usually 5 or 7 years) as opposed to a 15-year amortized write-off of the goodwill.

Whether you are the buyer or the seller, don’t leave the asset allocations to chance. Negotiate the allocation as part of the sales agreement. If you don’t, you could easily end up with inconsistent treatment and potential adjustments by the IRS.

Please Contact a Tax Attorney at Ainer & Fraker, LLP if you are anticipating a sale or purchase so the transaction can be structured to your best benefit.