The Problem: I sold a small business in April of this year for $90,000. My accountant said that I would have to pay capital gains on the proceeds less some small expenses, eg, cost of sale. The original purchase price of $43,000 of the business has long been depreciated. I've owned and run the business for 8 years as a sole owner. I am assuming I will have to pay about $16,200 in capital gains (18%). My accountant said that I could prepay some year 2003 bills this year to minimize the capital gains for this year. Some of the prepays were: property taxes and mortgage interest on 2 rentals. In July I used most of the proceeds to purchace a rental. I'm assuming the expenses of purchasing and repairs of the new rental can be deducted against the capital gains of the sale of the business. Is there anything else that I can do to minimize the capital gains due for this year? How much will I pay on the recapture of the depreciation? Thanks in advance for all of your help.
Hi CapGain100:Recommendation: You need to get with your accountant and run projections of your tax this year and next year under different alternatives. In this regard, you need to bring into consideration all of the information that may have an effect upon your income taxes for this year and forecast for next year (wages, interest, dividends, passthrough items from K-1 schedules, other capital gain items, itemized deductions, etc.)It has been my experience that when a business is sold, you need to look closer at factors that may give rise to AMT. For example, prepaying state income tax should be considered; however, taxes are not deductible for deriving AMTI. If you cross over into an AMT situation for this year, you will find that you have wasted some deductions that might have been deferred into 2003.By the way, if you look at the regs, rulings and case law in connection with Section 461 (year of deduction) you will discover that you cannot just conveniently prepay a whole bunch of things and deduct them even if you are a cash basis taxpayer.With regard to the rentals, bear in mind that this is generally a passive activity and the business you sold was presumably an activity where you had material participation and not subject to the rules provided for under IRC 469 (passive activities) and the regulations related thereto. In other words, you may not be able to offset capital gains from an allocation to goodwill with respect to the business sale against passive activity losses. In addition, if your AGI is too high this year, you may not even get much tax benefit in connection with the rental properties this year.Based on the information from your post, I am assuming that no allocation of the business sales price relates to real property. Therefore, the depreciation recapture may apply to personal property that you sold as part of the whole business sale. Depending upon the sales price allocation, there can be some Section 1245 recapture which effectively means that a portion of the gain upon sale is treated as ordinary income, not capital gain.Best regards,LeBean :-)
I am assuming I will have to pay about $16,200 in capital gains (18%). Sorry, but the 18% rate won't apply for another couple of years. You won't be able to do better than 20%. Any depreciation recapture will increase that rate.My accountant said that I could prepay some year 2003 bills this year to minimize the capital gains for this year. Maybe, but likely not. They'd have to be items that would add to your basis in the business. Since you sold in April, I'd think that anything related to the business would come due before next year. I can't think of anything that would come up in the normal course of business that fits this description.What you're probably thinking of is itemized deductions. Those won't reduce the captial gain, but they can reduce your total tax bill.Some of the prepays were: property taxes and mortgage interest on 2 rentals. Property taxes can be prepaid as long as they relate to 2002. The only mortgage prepayment that you can deduct is your Jan 1 payment. That is because it is paying interest for the month of December. And neither of these will reduce your capital gain, they reduce your income from rents - part of your ordinary income.In July I used most of the proceeds to purchace a rental. I'm assuming the expenses of purchasing and repairs of the new rental can be deducted against the capital gains of the sale of the business. Bad assumption. They are capital expenses of the rental property. Except for the land portion of the purchase, they will be depreciated and deducted against the rental income from the property.Is there anything else that I can do to minimize the capital gains due for this year? Perhaps sell some losing stock? Your sale is done, so there's not much you can do at this point. A little planning before the sale would have been worthwhile.How much will I pay on the recapture of the depreciation? 25%. All of these are federal numbers. If your state has an income tax, you'll need to add in your state taxes as well.--Peter
OOPS!! Capgain100:How much will I pay on the recapture of the depreciation? me - sticking my foot in my mouth:25%. That rate is correct only for real estate. If the depreciable items you sold were personal property - furniture, equipment, computers - the depreciation recapture is ordinary income and will be at your marginal rate. Depending on your other income that could be anywhere from 10% to almost 39%.--Peter
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