Selling Business Assets:
This is probably the area that business owners know the least about, besides knowing that this is when the capital gains tax comes into effect. Any time you sell something that you have been taking deductions for as business use property, there will most likely be a taxable event, gains, and tax liability generated. If you sell the item for less than you paid for it, why is there a gain and tax, you say? Let’s take a look at the copy machine you bought in 1995, that you want to sell because you need a higher capacity model:
You paid $3000 for the copy machine, and set up accelerated depreciation on your tax return, which you took as deductions in 1995 and 1996. This method of depreciation allowed you to take 20% the first year, and 32% of the cost the second year, for a total of $1560 in depreciation, reducing the basis of the copy machine (what’s left to depreciate) to $1440. You have an offer of $1750, for the machine, which will generate a gain of $310 ($1750 less $1440) because you have already take deductions of $1560 to reduce your taxable income. And if you had selected the Section 179 deduction in 1995, you would have written off the entire cost of the copy machine in one year, and would now have a gain of the entire $1750.
The capital gains tax rate has just been reduced for assets that have been held for more than 18 months, from 28% to 20% maximum.
The rules for depreciation are complex, although you do have some choice about the amount of deduction to take each year, over the life of the asset. You do not have a choice about the tax treatment when you sell it, however, and if it is property that you used prior to putting it in the business, your options become even less. Any property that has been depreciated (this includes vehicles that you have taken the mileage deduction for) can generate taxable gain, called ordinary gain and capital gain, depending on the selling price. And the faster you have depreciated the item, the more likely it is that you will have gain to pay tax on.
There is nothing wrong with making money on the sale of business assets; you just need to be prepared for the additional tax liability it generates. If you sell your business, you are selling many different types of assets, and each type has a different rule about calculating taxable gain, i.e., inventory and A/R, fixed assets (equipment), and goodwill all have to have share of the selling price allocated to them, and gain calculated separately. And if you are a partner and/or member in a business that has changed partners and/or members along the way, there are other surprises in store.
A word of caution here is to be prepared for this type of action to be more complicated and take more planning than ordinary inventory sales. Talk with your accountant before negotiating the agreement to find out what works best for your situation.
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