Understanding the Tax Implications of a Business Sale

Understanding the Tax Implications of a Business Sale

 

LUTZ BUSINESS INSIGHTS

 

understanding the tax implications of a business sale

bill kenedy, LUTZ consulting and m&a shareholder

 

Most business sale transactions are structured as ‘asset sales.’ This is where the buyer sets up a new entity that acquires the assets of the selling business. How a business is structured can have significant tax implications to a seller. In addition, how the company allocates its purchase price amongst its assets in the transaction will also affect its tax level. In this blog, we cover a few of the most significant issues we have seen surprise business owners.

 

C-Corps vs. S-Corps Taxation

Because C Corporations are legally considered a separate tax-paying entity, they are subject to a double layer of taxation when selling assets. A C-Corporation will first pay tax at the applicable corporate rate on the gain associated with the sale of assets being sold by the corporation. The shareholders will then pay taxes at capital gains rates when the remaining cash is distributed out of the corporation to the extent these proceeds exceed their basis in the corporate stock. One way C-Corps can avoid this double taxation is by doing a stock sale versus an asset sale. When a C-Corporation owner sells their stock, they only pay capital gains tax on the difference between the sale price and their basis in the stock. 

In contrast, S-Corps are pass-through entities which are not subject to tax but rather pass their tax attributes out to their owners. As a result, S-Corporations only pay taxes once, at the shareholder level, when selling their assets. Because of the single taxation, many small businesses choose to utilize the S-Corporation structure over a C-Corporation.

 

Depreciated Equipment

The amount of proceeds allocated to equipment (any property besides real estate), that has been depreciated for tax purposes, are taxed at ordinary rates, to the extent the asset was depreciated.

Example:

You purchased a machine in 2016 for $10,000 and, over three years, deducted $7,000 of depreciation. Three years later, in 2019, you sell this machine for $8,000. This means that the basis on the machine at the time of the sale would be $3,000 ($10,000 – $7,000 = $3,000). The gain on the sale would be $5,000 ($8,000 of proceeds less $3,000 of basis). All $5,000 of the gain would be taxed at ordinary rates since the $5,000 does not exceed the amount of depreciation deducted on the machine. If your gain is greater than the depreciation deducted for the piece of equipment, there is potential for a portion of the gain to be taxed at the lower capital gains rate.

 

Cash-Basis Companies

Many times, in our initial meetings with business owners considering a sale, they assume the asset sale price would be considered a 100% capital gain. However, this is often not the case, and it can have a material impact on the net proceeds the business owner receives after paying taxes. Aside from the example above for depreciated equipment, another example that can result in an owner paying taxes at ordinary rates we often see is a company utilizing the ‘cash-basis’ method. Using this method means a portion of the sale proceeds is allocated to Accounts Receivable.

For example, as discussed above in an asset sale, the sale price will be allocated to the various assets being purchased as a part of the sale. A portion of the sale proceeds will be allocated to accounts receivable. If the business has been utilizing the cash-basis method, it has not recognized income associated with these receivables. So, 100% of the proceeds allocated to these receivables would be taxed at ordinary income rates.

 

Both the sale structure (asset vs. stock sale) and how the proceeds are allocated amongst the assets, can have a material impact on the amount of taxes associated with the business sale. We recommend that, after gaining an understanding of the value of your business, you also take the time to determine the potential tax implications. Doing this will help you prepare your financial plan and consider if adjustments to the sale structure might result in a tax benefit on the sale. If you have any questions or need help determining the tax implications on your business sale, please feel free to contact us for assistance.

ABOUT THE AUTHOR

bill kenedy

402.492.2132

bkenedy@lutz.us

BILL KENEDY + LUTZ CONSULTING AND M&A SHAREHOLDER

Bill Kenedy is a Lutz Consulting and M&A Shareholder at Lutz. He specializes in business valuation, litigation support, and merger and acquisition advisory services.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Certified Public Accountant
  • Accredited in Business Valuation
  • Certified in Financial Forensic
  • Certified Exit Planning Advisor
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, St. John’s University, Collegeville, MN
COMMUNITY SERVICE
  • Construction Financial Management Association, Past Treasurer, Board Member
  • A Time to Heal (non-profit focused on cancer patients), Past Board Member

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4 Ways an Accountant Can Make Your Business Successful

4 Ways an Accountant Can Make Your Business Successful

 

LUTZ BUSINESS INSIGHTS

 

4 ways an accountant can make your business successful

mark dediana, accounting manager

Professional accounting involves more than just basic bookkeeping. It might be what your business needs to get to the next phase. However, it may also be one of the things that you keep putting off.

Great accountants don’t just take care of tax-prep and compliance issues. Like business partners, they give you insights that deliver practical benefits. They also offer strategic advice to support future business decisions.

Have you been procrastinating the decision to seek a professional accountant? Here are 4 reasons why you should stop deliberating now:

Compliance 

An accountant will comprehensively understand your company’s finances. Part of their work includes streamlining such finances. They ensure that your business or investment venture does not commit a financial crime.

There are numerous financial requirements that you have to comply with. They include those set by the Internal Revenue Service (IRS), your state or local government, and even your bank. To ensure compliance, accountants will prepare:

  • Federal, state, and local tax forms
  • Financial statements, which also come in handy when settling audits and reviews.

Internal Controls 

As a business owner, you have to stipulate guidelines that protect your company’s financial and operational data. A professional accountant will help you establish policies and guidelines that help to protect that data, and protect your company’s assets. They will also assist you in formulating effective reporting mechanisms. The guidelines can help to:

  • Prevent and detect instances of fraud, whether coming from an employee or from an outside party
  • Streamline administrative and management tasks

Strategic Direction

The accounting function plays a vital role in your business by capturing and analyzing financial details. Such details provide a summary of your business operations. You can later review them to check your company’s overall growth. Also, you can use historical financial details to formulate strategic plans for future business growth.

Additionally, your accountant can help you start new businesses and grow existing businesses by analyzing and providing advice regarding:

  • Entity selection and structure
  • Effective tax minimization strategies
  • Technology and software investments

Peace of Mind 

As a business owner, your key objective should be to serve your clients well and grow your company. It will be complicated to do this when you have to handle all minor operations alone. Accounting is one of the tasks you can delegate since it is not intricately tied to your unique business operations. Benefits of delegating accounting work are:

  • Effectively minimize your workload
  • Ability to spend more time focusing on other important business functions
  • Get accurate and dependable financial projections, reports, and advice that you can use to make future business decisions
  • Save money compared to hiring an employee to do the same work
  • Know that the work will be done right

We have been offering professional business solutions since 1980. Having worked with numerous companies, we know what works well in varied industries. Our team features top-talent, authentic individuals who are ready to commit to your company’s goals, values, and attitude. What are you waiting for? Allow us to “Mind What Matters” by contacting us today to learn more.

ABOUT THE AUTHOR

402.462.4154
mdediana@lutz.us
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MARK DEDIANA + ACCOUNTING MANAGER

Mark DeDiana is an Accounting Manager at Lutz with over six years of relevant experience. He is responsible for providing assurance services to clients with a focus in the nonprofit industry. In addition, he assists with individual and business income tax returns.

AREAS OF FOCUS
  • Individual & Business Taxation
  • Auditing & Consulting
  • Nonprofit Industry
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Association of Certified Fraud Examiners, Member
  • Hastings Young Professionals, Member
  • Certified Public Accountant
  • Certified Fraud Examiner
EDUCATIONAL BACKGROUND
  • BBA in Accountancy, University of Notre Dame, Notre Dame, IN
COMMUNITY SERVICE
  • Prairie Loft, Board Member

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P: 402.462.4154

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Omaha, NE 68154

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LINCOLN 

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Lutz adds Hesselgesser, Hinrichs and Masek to Central Nebraska Offices

Lutz adds Hesselgesser, Hinrichs and Masek to Central Nebraska Offices

 

LUTZ BUSINESS INSIGHTS

 

Lutz adds hesselgesser, hinrichs and masek to central nebraska offices

Lutz, a Nebraska-based business solutions firm, welcomes Kelli Hesselgesser to its Grand Island office, and Brooke Hinrichs and Leslie Masek to its Hastings office.

Kelli, Brooke, and Leslie join the team as staff accountants. They are responsible for preparing individual and business income tax returns, as well as providing credibility to clients through financial reporting.

Hesselgesser interned with Lutz in the summer of 2018, as well as, tax season 2018 and 2019. She graduated from Hastings College with a Bachelor’s degree in accounting.

Hinrichs interned with Lutz during tax season in 2018 and 2019. She graduated from Hastings College with a Bachelor’s degree in accounting.

Masek interned with Lutz during tax season in 2018. She received her Master’s degree in business administration from the University of Nebraska-Kearney.

 

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HASTINGS

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OMAHA

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Omaha, NE 68154

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Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

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Grand Island, NE 68803

P: 308.382.7850

Lutz adds Howes, McLane, Schriner, and Shafer

Lutz adds Howes, McLane, Schriner, and Shafer

 

LUTZ BUSINESS INSIGHTS

 

Lutz adds howes, mclane, schriner, and shafer

Lutz, a Nebraska-based business solutions firm, welcomes Jessica Howes, Andy McLane, Dakota Schriner, and Jeffrey Shafer.

Jessica Howes joins Lutz as a Talent Sourcer in the Omaha office. She is responsible for interviewing and placing candidates for Lutz Talent clients. Howes focuses on recruiting for the accounting, finance, office administrative and human resource industries. Graduating from the University of Nebraska at Lincoln, Jessica received a Bachelor’s degree in hospitality management with a minor in leadership communication. 

Joining Lutz Tech as a Systems Engineer, Andy McLane brings over 18 years of technology systems and engineering experience to the team. He is responsible for installing, configuring and maintaining application software and system management tools. Andy graduated from the University of Nebraska at Lincoln with a Bachelor’s degree in biological sciences. McLane works in Lutz’s Lincoln office.

Dakota Schriner joins Lutz’s accounting division as a Staff Accountant in the tax department. He performs complex consulting, as well as controversial service projects. Projects include assisting clients with tax-related issues from pursuing tax incentives, to managing state tax audits. Dakota received his Bachelor’s degree in accounting and management information systems from the University of Nebraska-Omaha. Dakota works in Lutz’s Omaha office.

Bringing over eight years of industry experience, Jeffrey Shafer joins Lutz Tech as a Systems Administrator in Lutz’s Omaha office. He is responsible for ensuring all systems are in working order through day-to-day system repairs and maintenance. Specifics include software installations, security inspections, server upkeep, troubleshooting and other technical support for end-users. Graduating from Bellevue University, Jeffrey received his Bachelor’s degree in information technology.

 

RECENT POSTS

Are We Headed for a Recession?

Are We Headed for a Recession?

Each morning I craft a Market Update email that I share with our advisors. This email provides commentary on what is happening in the markets and the economy. It includes data related to asset class…

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Family Philanthropy + Creating a Shared Legacy

Family Philanthropy + Creating a Shared Legacy

 

LUTZ BUSINESS INSIGHTS

 

family philanthropy + creating a shared legacy

lisa strutzel, family office services director

 

There’s no denying it: you feel good when you do good. The brain stimulation that occurs from being charitable is credited for a variety of benefits, including reducing stress, feeling happier, and improving life satisfaction. Health reasons aside, creating a shared legacy through family philanthropy positively affects your family. A family that works towards a common philanthropic vision perpetuates family values, provides educational opportunities for family members, and fosters family bonds.

PERPETUATES FAMILY VALUES

How does a family collectively determine what it truly values and the resulting legacy it wants to pass on? Defining a shared legacy requires individual and group reflection. A common vision needs to be identified, as it guides the family’s giving strategy. As so aptly put by Yogi Berra, “If you don’t know where you are going, you might wind up someplace else.” 

Creating a charitable mission statement is a good way for a family to express its values and passions. A mission statement articulates the family’s purpose for giving and the impact it wants to achieve. It provides the framework for goal setting and helps ascertain where to place the giving focus. 

A good example of a clearly stated purpose for giving is the Bill & Melinda Gates Foundation mission statement:

Guided by the belief that every life has equal value, the Bill & Melinda Gates Foundation works to help all people lead healthy, productive lives. In developing countries, it focuses on improving people’s health and giving them the chance to lift themselves out of hunger and extreme poverty.

PROVIDES EDUCATIONAL OPPORTUNITIES

Philanthropy is a way for a family to move from talk to action while learning valuable life lessons. “Giving together creates spaces for collaboration and engaged focus on one giving mission and opens the door to multi-generational learning between older and younger members of the family.”[i] Philanthropy provides an exceptional opportunity for learning, regardless of how a family chooses to practice its giving. 

Compassion and empathy are taught to younger children when family members model what it means to be charitable and have conversations concerning the challenges faced by those less fortunate.

Money management skills are learned when parents require kids to use the “giving jar” approach to allocating allowance. By sharing a portion of their savings with others, children can experience first-hand what it means to make a difference. 

Teamwork, social awareness, and problem-solving is reinforced by volunteering as a family to support a common cause. Serving a meal at a local homeless shelter or assisting with a building project in a low-income community are excellent ways to fortify family values and instill gratitude. 

Leadership, governance, and financial competencies are promoted when a family foundation is the vehicle for charitable giving. A foundation is a legal structure that requires corporate governance, exposing junior board members to the intricacies of a philanthropic board. Additionally, it’s an optimal setting for introducing financial fundamentals like investing, budgeting, and grant-making.   

FOSTERS FAMILY BONDS

As a family becomes more disparate from size, location and age perspectives, family philanthropy can act as the tie that binds. Foundation meetings and service projects offer opportunities for connection. Practicing philanthropy provides the means for a family to work through generational differences in a nurturing environment to perpetuate its shared legacy.

Jay Hughes talks about the bonds created by family philanthropy in his family wealth book stating, “Most important, it tightens family bonds—the family glue—by recognizing and acknowledging the creativity and passions of each member.”[ii]

RESULTS BEYOND CALCULATION

Does your family have a shared legacy? If not, it may be beneficial to create one with philanthropy at the forefront. Working together for a charitable purpose not only makes the community better, but it does substantial good for your family as well. In the words of Miriam Beard, “The results of philanthropy are always beyond calculation.”

 

[i] Family Philanthropy Guide. (n.d.).  Retrieved from https://givingcompass.org/family-philanthropy/

[ii] Hughes, J. (2004). Family Wealth: Keeping it in the Family – How Family Members and Their Advisors Preserve Human, Intellectual, and Financial Assets for Generations. Bloomberg Press.

ABOUT THE AUTHOR

402.763.2974

lstrutzel@lutz.us

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LISA STRUTZEL, CPA, CAP® + FAMILY OFFICE SERVICES DIRECTOR

Lisa Strutzel is the Family Office Services Director at Lutz with over 14 years of past experience as a family office executive. She is responsible for assisting high-net-worth clients manage their family enterprise. 

AREAS OF FOCUS
  • Family Office Services
  • Financial Reporting
  • Philanthropy and Legacy Planning
  • High-Net-Worth Families
AFFILIATIONS AND CREDENTIALS
  • Certified Public Accountant
  • Chartered Advisor in Philanthropy, CAP®
  • Family Office Exchange, Integrated Wealth Advisor Council Member
  • Purposeful Planning Institute, Member
  • Nebraska Society of CPAs, Member
EDUCATIONAL BACKGROUND
  • BBA, Iowa State University, Ames, IA
COMMUNITY SERVICE
  • The Hope Center for Kids, Board President, Past Treasurer
  • CAP Advisory Board Member

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P: 402.462.4154

OMAHA

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Omaha, NE 68154

P: 402.496.8800

Toll-Free: 866.577.0780  |  Privacy Policy

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GRAND ISLAND

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Grand Island, NE 68803

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How Automating Payroll Will Change Your Life

How Automating Payroll Will Change Your Life

 

LUTZ BUSINESS INSIGHTS

 

how automating your payroll will change your life

mike perry, client accounting services director

 

You didn’t start a business to learn about compliance with federal and state employee compensation rules. Yet here you are, wearing out your calculator twice a month as you try to stay current with tax tables, government regulations, and worker benefits. One small mistake, and you’re paying penalties, making employees and a whole lot of agencies, or benefits providers unhappy.

Isn’t your time better spent managing your business and planning for its growth? Automating payroll will give you those hours back and reduce the possibility of costly errors exponentially. There are countless websites that provide these services. They can help you:

Maintain comprehensive employee profiles

How do you store and retrieve your employee information now? On time cards, in folders or Microsoft Word files? However you do so, it can be cumbersome just looking up details. Payroll websites let you create online records for each employee that contain everything you need to know, including:

  • Contact information
  • Compensation
  • Required tax form data from the W-4 and W-9
  • Benefits
  • Direct deposit authorization

Set up multiple pay schedules

Do you pay some employees weekly and others semi-monthly, for example? Payroll websites accommodate such an arrangement. They also allow off-cycle payroll runs.

Define multiple earnings types

You might pay some workers by the hour while others get an annual salary, but payroll websites go well beyond these classifications. They can support bonuses, commissions, etc., and even let you set up custom earnings types. You can also automate withholding, like garnishments.

Calculate state, federal, and local payroll taxes

This step is probably the bane of your existence if you’re processing your company’s payroll manually. The online solutions available not only calculate payroll tax withholding, but most of them actually submit those taxes and any filings necessary by the prescribed deadlines.

Add deductions for pre-tax benefits

If you offer your employees benefits like health insurance and retirement plans, calculating and incorporating those payments and any matching contributions you make can also be quite the challenge. Payroll websites automate this step.

Track sick and vacation time

Once you define your PTO policies, you will always know when an employee is eligible to take time off.

Prepare W-2s in January

Using the data they’ve collected through the year, most payroll websites take this task off of your to-do list, too.

Set up all of this

These online applications usually offer step-by-step tools to setup and get ready to run payroll. Company onboarding specialists are also always available to help.

Run payroll

Actual payroll processing generally only takes a few minutes. If your payroll is often the same, you may be able to put it on autopilot.

If you’re already doing your payroll manually, you should be able to make the transition to online fairly easily. But if you’re struggling with or new to employee compensation, we can help you get up and running, or even take over this element of your accounting completely. Contact us, and we can discuss your options.

 

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ABOUT THE AUTHOR

Mike Perry + Lutz Client Accounting Services in Nebraska

402.827.2087

mperry@lutz.us

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MIKE PERRY + CLIENT ACCOUNTING SERVICES DIRECTOR

Mike Perry is a Client Accounting Services Director at Lutz with over 15 years of accounting experience. He focuses on providing business consulting, software implementation and training, accounting procedure assistance and outsourced accounting replacement consulting for closely held companies.

AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
  • American Institute of Certified Public Accountants, Member
  • Nebraska Society of Certified Public Accountants, Member
  • Intuit Certified ProAdvisor, QuickBooks Advanced
  • Certified Public Accountant
EDUCATIONAL BACKGROUND
  • BSBA in Accounting, University of Nebraska, Kearney, NE
COMMUNITY SERVICE
  • Community Bike Project Omaha, Past Treasurer
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We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

Toll-Free: 866.577.0780  |  Privacy Policy

All content © Lutz & Company, PC

 

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND

3320 James Road, Suite 100

Grand Island, NE 68803

P: 308.382.7850