James Hamill for the ABQ Journal writes: Question: I am selling my business, which is primarily a consulting business. The buyer’s tax adviser says that most of the purchase price is goodwill and that we will both report to the IRS that goodwill was sold and purchased. He also says this is good for me because I get capital gain treatment for goodwill. When I asked for some proof that this was right he said that he could not give me proof because I was not his client and I needed to check with my own tax adviser. So I went on line and found IRS Publication 544, which supposedly tells what a capital asset is. I can’t understand it. It has a list of what a capital asset is but goodwill is not in the list. It then has a section on “Section 197 intangibles,” which lists goodwill, but it does not say that goodwill is a capital asset. There is also a section on business assets called “Section 1231 assets,” which includes livestock and timber, but no goodwill. I want a definite answer before I sign documents.
Answer: A sale of goodwill will allow you to report a capital gain. Perhaps the confusion comes from the fact that the tax law itself does not say what a capital asset is, it instead says what it isn’t.
A capital asset is anything other than the things the tax law says it is not. Because goodwill is not on the list of non-capital assets, it is then a capital asset.
Because your self-created goodwill was not amortizable by you, it is best classified as a capital asset rather than a Section 1231 asset. Both are entitled to favorable capital gain tax rates.
Q: My wife and I own 7 different real estate properties, with each held in a separate S corporation. We have to file 7 different corporate tax returns every year although all income ends up on our personal tax return. We want to simplify our tax life by putting all the properties in one corporation so we have only one tax return. Can I liquidate 6 of the corporations and just transfer their assets to the one that we keep?
Answer: Well you can, but that’s not the best way to do it from a tax standpoint. The liquidation of an S corporation results in a deemed sale of the corporate assets to the shareholders, and you may create a large taxable gain.
There are two ways to do what you want without a tax issue. Which one you select depends on what your non-tax objectives for having multiple corporations are.
In general, when people do what you and your wife have done the primary motivation is to isolate different properties in different legal entities to create a liability shield. It may continue to be useful to have 7 different entities for this purpose.
If your greatest concern is the 7 different tax returns, you can have one S corporation serve as a holding company that owns all of the stock of the other entities. You and your wife would own the holding company.
The next step is to make elections to treat each corporation owned by the holding company as a qualified subchapter S subsidiary (“QSub” for short). This election is made by filing a Form 8869 for each entity.
The election allows you to pretend that the QSubs have liquidated into the holding company. Unlike the liquidation that you proposed, this liquidation is tax free because the shareholder is itself a corporation.
So you could keep each S corporation alive for state law purposes, yet have only one corporation that must file a tax return (since the others have been deemed to be liquidated).
If you really want to reduce the entities to just one, for both tax and state law purposes, you can merge 6 of the corporations into the one survivor. This will be a tax-free reorganization, either as a type “A” or an “acquisitive D.”
While the specifics can be complicated, the bottom line is that you can achieve what you want (simplified tax filings) but you need to consult with an attorney about what the best structure is for liability protection.
0 comments:
Post a Comment