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Author: aj485 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 15349  
Subject: Re: Buying a business as an investment Date: 6/4/2012 3:17 PM
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It's absentee, so time isn't an issue.

Then I'm back to the question of why does the owner want to sell if there truly is an expectation that the business will return 30% pre-tax going forward, since it would only take him a little over 3 years to recover the amount he could get from a sale? But if he's your friend and it seems reasonable to you, then I guess that's your call.

I understand various rates apply to capital gains, but in my limited experience with investing income, I usually get 1099-INT or 1099-DIV and add them up on, what, I think line 8 or 9 of the 1040 and that just gets added to my income total, so it all ends up as a lump sum subject to the normal taxation rate. That's how I ended up doing my calculations with the 33%....

Close, but not exactly.

For the 2011 1040, taxable interest ends up on line 8a of the 1040, and tax-exempt interest ends up on line 8b of the 1040. Taxable interest is added to your income, and tax exempt interest doesn't.

However, there are also 'various rates' that apply to dividends. There are 'qualified' divdends that are currently taxed at a maximum of 15%. All dividends end up on line 9a of the 1040, but then you put any qualified dividends on line 9b.

Then, on line 44 of the 2011 1040, when calculating the tax on your taxable income, you will either fill out a 'Schedule D Tax Worksheet' or a Qualified Dividends and Capital Gains Tax Worksheet' where the lower rates are applied to capital gains and qualified dividends, as appropriate.

AJ
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