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Article Date:
January 2016

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Selling Your Business: How to Make Tax-Saving Price Allocations for an Asset Sale

If you sell a business that you’ve operated as a sole proprietorship or a single-member LLC treated as a sole proprietorship for tax purposes, you automatically make an asset sale for tax purposes.


Why? Because either you owned the business assets personally or, in the case of the single-member LLC, the law treats you as if you owned them personally. Here, you report the resulting taxable gains and losses on your Form 1040.


You can also arrange an asset sale for a business you’ve operated as a corporation, a partnership, or a multimember LLC treated as a partnership for tax purposes. The asset sale is likely your second choice. Your likely first choice for a corporate or partnership sale is to sell your ownership interest, rather than the assets, for two reasons:



Selling your ownership interest generally divorces you from any ongoing exposure to business-related liabilities.


The taxable gain from selling an ownership interest that you’ve held for more than one year is generally treated as a lower-taxed long-term capital gain.1


In contrast, buyers generally prefer to purchase assets rather than ownership interests for two reasons:



An asset purchase generally avoids exposure to unknown or undisclosed business liabilities.


The assets purchased come with the stepped-up (increased) basis to reflect the purchase price.


With the asset purchase, the buyer claims bigger depreciation and amortization deductions for buildings, furniture, equipment, and intangibles. Also, if the buyer sells some of these assets shortly after purchase, the higher basis reduces taxable gains when assets are sold or converted into cash.


Because of the big advantages to the buyer, you might have to accept an asset sale to close the deal.


This article explains how to get the most favorable federal income tax results from an asset sale. ... Log in to view full article.

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