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.

Strategic Tax Planning for Capital Gains and Losses

Tax Attorneys at Ainer & Fraker, LLP Discuss the Strategic Tax Planning Options for Capital Gains and Losses.

Year-end has historically been a good time to plan tax savings by carefully structuring capital gains and losses.  Conventional wisdom has always been to minimize gains by selling “losers” to offset gains from “winners,” and where possible, generate the maximum allowable $3,000 capital loss for the year.

Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. (“Long-term” means that the stock or property has been held over one year.) Keep in mind that taxpayers may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing adjusted gross income or AGI.  Individuals are subject to federal income tax at a rate as high as 39.6% on short-term capital gains and ordinary income. But long-term capital gains are generally taxed at a maximum rate of 15% or 20%.

All of this means that having long-term capital losses offset long-term capital gains should be avoided where possible, since those losses will be more valuable if they are used to offset short-term capital gains or ordinary income. Avoiding this requires making sure that the long-term capital losses are not taken in the same year as the long-term capital gains. However, this is not just a tax issue; investment factors also need to be considered. It would not be wise to defer recognizing gain until the following year if there is too much risk that the property’s value will decline before it can be sold. Similarly, one wouldn’t want to risk increasing a loss on property that is expected to continue declining in value by deferring its sale until the following year.

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, a taxpayer should take steps to prevent those losses from offsetting those gains.

  • Increased Capital Gains Rates – The special long-term capital gains rates that have been in effect since 2003 are revised as of 2013and for future years without Congressional tinkering. The capital gains rates are now 0% to the extent your marginal tax rate is 10% or 15% and 15% to the extent your marginal rate is between 25% and 35%. This means that the 15% capital gains rate will apply for individuals who file the single status with taxable income in 2013 between $36,251 and $400,000. The 15% capital gains rate for married couples filing jointly will be in effect if their 2013 taxable income is between $72,501 and $450,000. For higher income taxpayers – those in the 39.6% tax bracket – the capital gains rate increases to 20%.

    Individuals with large long-term capital gains in their investment portfolios might consider taking a profit up to the amount that would be taxed at 0%. The good news here is that the wash sale rules do not apply to assets sold at a gain. So if you like a stock, you are free to buy it back right away. If your state doesn’t have a lower tax rate on capital gains, then the additional state tax you’d pay from selling profitable capital assets will need to be weighed against the federal tax you’d potentially save when deciding whether to make tax sales before year-end.

  • Increased Marginal Tax Rates – Beginning in 2013 the marginal rates are 10, 15, 25, 28, 33, 35 and 39.6 percent (up from 10, 15, 25, 28, 33 and 35 percent). These rates apply to “ordinary” income including short-term capital gains.

    Conventional wisdom has always been to defer income, but depending upon your tax bracket and future income you anticipate, it may be appropriate to consider accelerating income to take advantage of a lower tax rate.

It may be in your best interest to review youy current year tax strategy with an eye to the future to maximize your benefits from gains or losses associated with capital assets.

Please Contact a Tax Attorney at Ainer & Fraker, LLP to discuss Strategic Tax Planning options for Capital Gains and Losses.