Selling Your Business

Know the tax consequences beforehand

The tax consequences of selling a business depend on whether you operate as a sole proprietor or a corporation. As a sole proprietor, selling your business means you are selling the individual assets of the business. The sale of a business is not usually a sale of one asset. Instead, some or all of the business’s assets are sold. When this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.

If you are incorporated, you can either sell your stock to another individual, or the corporation can sell the assets. If the assets are sold, the corporation pays the tax on any gain. You, as a shareholder of the corporation, do not have a tax consequence unless the corporation liquidates and distributes the proceeds of the sale to you in exchange for your stock.

In any case, if you sell your business, you may need to complete additional tax forms with your annual tax return. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory. The sale of capital assets results in capital gain or loss. The sale of inventory results in ordinary income or loss.

It’s important to determine what the potential tax consequences are prior to signing the sales contract. If you want to defer the gain on the sale, an installment agreement might be an option. Let me help you understand your options so we can discuss the tax consequences before you sell.

Working with Your Spouse

Is your spouse your employee?

One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees can vary from those that apply to other employees. There are a couple of different ways a married couple can operate a business together.

If you operate a sole proprietorship and you hire your spouse as an employee, you have an employee/employer relationship. This means one spouse substantially controls the business in terms of management decisions and the other spouse is under his or her direction and control. If such a relationship exists, then the non-owner spouse is an employee subject to income tax withholding, social security and Medicare tax, but not to FUTA tax. If this type of arrangement exists, you can provide benefits to your spouse and deduct them on your business return. One of these benefits can be health insurance. If your spouse is a bona-fide employee and is paid a reasonable wage for the services that he or she performs, you can provide health insurance to your spouse with a policy that covers both of you. This way you are allowed a deduction for the coverage on your business return and, in turn, reduce your self-employment tax. You can also provide retirement benefits to your spouse.

On the other hand, if your spouse has an equal say in the business affairs, provides substantially equal services to the business, and contributes capital to the business, then a partnership relationship exists and the business’s income should be reported on Form 1065. When spouses carry on a business together and share in the profits and losses, they are partners in a partnership regardless of whether they have a formal partnership agreement. They should not report the income on a Form 1040, Schedule C, in the name of one spouse as a sole proprietor nor should they file a joint Schedule C. In a partnership, each spouse reports their separate share of the partnership income and pays their own self-employment tax. This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based.

An Age To Remember

Quick tips

Knowing key tax birthdays can help trim your annual tax bills. Below are some ages worth noting:

0

If your child is born during the year, even as late as 11:59 p.m. on December 31, you can claim a dependency exemption for your child. This comes with one catch. You need to file for the child’s social security number (SSN) and include it on your tax return. If you don’t, the dependency exemption is denied, along with any potential for certain tax credits. If your dependent doesn’t have and can’t get an SSN, you must show the individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN) instead of an SSN.

0-12

The good news is you gain tax advantages by contributing to your employer’s flexible spending account to cover child care expenses, or you may qualify for a child care credit on your tax return. The bad news is that any investment income over $2,100 in your child’s name is taxed at your rate until the child reaches age 27. There is relief coming with this, however, beginning in TY2018. Be watching after the busy season for some information regarding the changes under the Tax Cut and Jobs Act of 2017.

13

Once your child reaches age 13, you no longer qualify to take the child care credit. Eligibility is determined on a daily basis.

16

This is the last year your child qualifies you for the $1,000 child tax credit.

18

If you own a business, you can pay your children to work for you and avoid paying Social Security and Medicare taxes on their wages. Once they reach age 18, you are required to withhold payroll taxes like any other employee.

27

At this age, children are taxed at their own rates on investment income. In addition, they are no longer eligible for their parents’ health insurance benefits.

50

Congratulations. Not only have you reached the half century mark, you can contribute an additional $1,000 to your IRA, bringing the total contribution limit to $6,500.

55

You and your covered spouse are eligible to make an additional $1,000 contribution to your HSA.

59.5

This is the magic age when you may take money from IRAs and retirement plans without incurring the additional 10% penalty for early distributions. There are exceptions to the penalties if you are younger, but this is the age when you may take penalty-free distributions for any reason.

65

Once you reach age 65, you qualify for an additional standard deduction and, if certain conditions exist, a tax credit. For tax purposes, you are considered to reach age 65 on the day before your 65th birthday.

70.5

At this age, you are required to begin distributions from your traditional IRA. If you have a Roth IRA, this rule doesn’t apply. If you have a retirement plan with your employer, you are still working, and you do not own more than 5% of the company, you can delay distributions even if you reach age 70½.

Automobile Expenses

Which is better, deducting the standard mileage rate or claiming actual expenses?

With the standard mileage at 53.5 cents per mile for 2017, it might be time to revisit what yields the more substantial deduction—the standard mileage rate for each business mile, or your actual car expenses. If this is the first year you have business use of an automobile, you don’t have to decide which method yields the better result until you file your return. If this is not the first year you have business use of an automobile, you cannot switch to the standard mileage rate in a later year if you started with deducting the actual expenses. On the other hand, if you started with deducting automobile expenses using the standard mileage rate, you can switch to the actual expense method.

Admittedly, claiming the standard mileage rate is a lot easier for most of us. All we have to do is keep track of our business miles and multiply them by the current rate. In addition, you may also deduct your costs for parking and tolls and, if you are self-employed, the interest on your car loan. Claiming actual expenses requires a bit more diligence in your recordkeeping. Doing so, however, may pay off in the end by giving you a larger deduction.

First, you must keep receipts for all your gasoline and oil, repairs, tires, licensing and registration fees, insurance, garage rent, lease fees, parking, tolls, and rental fees. If you are self-employed, you may also take the business portion of any interest you are paying on a car loan. Luxury and sales taxes are not deductible under any circumstance, although the amounts you pay can be added to your cost and recovered through depreciation.

Regardless of the method you choose, the expenses are limited to your business-use percentage. This percentage is calculated by dividing your total business miles by your total miles driven for the year. It’s wise to make note of your odometer reading on January 1 and again on December 31.

 

New Changes That May Affect Your 2017 Tax Filing

This morning President Trump signed a budget bill averting yet another government shutdown. Tucked in the Bipartisan Budget Act of 2018 are several extender provisions that expired but are now available retroactively through Dec. 31, 2017.

The most notable extenders include:

Exclusion for discharge of indebtedness on a principal residence. The provision extends the exclusion from gross income of a discharge of qualified principal residence indebtedness through 2017. The provision also modifies the exclusion to apply to qualified principal residence indebtedness that is discharged pursuant to a binding written agreement entered into in 2017.

Premiums for mortgage insurance (PMI) deductible as mortgage interest. The provision extends the treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2017. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000.

Above-the-line deduction for qualified tuition and related expenses. The provision extends the above-the-line deduction for qualified tuition and related expenses for higher education through 2017. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).

Extension of credit for non-business energy property. The provision extends through 2017 the credit for purchases of non-business energy property. The provision allows a credit of 10 percent of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500 (life-time).

If your return has already been filed, and you feel that one of these changes will affect your situation, please send us an email with any information. Your return may need to be amended. The charge for an amended return is $50, plus any additional forms that need to be included.