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Do You Need Estate planning- Es Group
The sale of a business creates many opportunities for planning: estate planning, business succession planning, and income tax planning are just a few of the topics business owners are faced with at this critical juncture. However, all too often, the business owners and their tax advisors hyper-focus on the conversion of those assets into cash. This one dimensional approach, does not fully take into account what is the end goal of many selling business owners: repositioning the business owner’s value into income-producing investments which produce a more tax-efficient return on equity. In some cases, there may be tax savings opportunities.
Take for example a hypothetical coal company in Kentucky trading as Cleaner Coal Technologies. Cleaner Coal Technologies has been in business for twenty years. The primary owner, Henry Duggett, wants to sell Cleaner Coal Technologies, move to the Powder River Basin and reinvest the sales proceeds in new equipment, a new brand, and a new physical plant. The company recently received an offer to purchase all outstanding shares and the ownership entity for twenty million dollars. If Henry had significant negotiating power, he might be able to simply sell his stock and pay long-term capital gains on the sale. If he had the right buyer, he might be able to negotiate a tax free reorganization under IRC § 368 and then use his new stock as collateral for a loan to finance his new company. However, most buyers will either want to purchase the assets only or insist that the stock sale be classified as an asset sale under IRC § 338(h)(10). As such, the purchase price would be allocated among all of the company’s assets under IRC §1060 and Henry would have to pay taxes on the net capital gains taxes at the federal and state level. This gain would be exacerbated by depreciation recapture on any capital assets that were depreciated during the last twenty years. All-in-all, the sales price of twenty million dollars could be reduced as much as 35-40%.
If Henry considers an asset sale, then his tax advisor should be looking for other opportunities to save him money. In Henry’s case, he should exploring the possibility of like-kind exchanges. If Henry were to “map out” his sale and repurchase and convert his ownership in equipment, intellectual property, and real estate into new equipment, intellectual property, and real estate, Henry could bury his cost basis into his new investment and successfully defer a majority of his capital gain. Goodwill of one company is never going to be like-kind to the good will of another company. Treas. Reg. §1.1031(a)- 2(c)(2). Nevertheless, in ILM 200911006, the IRS clarified that intellectual property “such as trademarks, trade names, mastheads, and customer-based intangibles can be separately described and valued apart from goodwill.” The IRS further pointed out that exchangeclients must take heed of the like-kind definitions applicable to intellectual property and personal property and must make sure that their replacement property is like-kind in both the nature and character according to Treas. Reg. § 1.1031(a)-2(c)(1). Furthermore, Treas. Reg. § 1.1031(a)-2(b) provides that depreciable tangible personal properties are of a like class if they are either within the same General Asset Class (as defined in Treas. Reg. § 1.1031(a)-2(b)(2)) or within the same Product Class (as defined in Treas. Reg. § 1.1031(a)-2(b)(3)). Whether intangible personal property is of a like-kind to other intangible personal property generally depends on (i) the nature or character of the rights involved (e.g., a patent or a copyright) and (ii) the nature or character of the underlying property to which the intangible personal property relates.
Two examples are provided in the regulations concerning exchanges of intangibles. In Treas. Reg. § 1.1031(a)-2(c)(3), Example 1, Taxpayer K exchanges a copyright on a novel for a copyright on a different novel; these properties were of a like-kind. In contrast, in Example 2, Taxpayer J exchanged a copyright on a novel for a copyright on a song, and the properties exchanged were deemed not of a like-kind. Thus, both the nature or character of the rights involved and the nature or character of the underlying property are taken into account.
As tax advisors, deeper levels of planning provide more areas for you to create value for your clients. The tax planning related to the sale of a business, in particular, gives an opportunity to create a competitive advantage over your peers.
About the Author
James’ responsibilities include serving as the primary point of contact for affluent and institutional clients. James works closely with a team of experienced advisors to offer customized exchange solutions. Prior to founding ES Group, James served as the Mid-Atlantic Regional Manager for two of the leading National 1031 Exchange Qualified Intermediaries, where he was responsible for assisting real estate investors, accountants, attorneys, REITs, and private equity groups with executing like-kind exchange transactions.
James is a licensed attorney and possesses an undergraduate degree in finance from the University of Scranton and a law degree from the Wake Forest University School of Law. James additionally obtained his Masters of Law (LL.M.) Degree from Georgetown University Law Center focusing on matters of securities law and tax planning.
James has executed hundreds of 1031 exchange transactions including dispositions approaching and exceeding one billion dollars. He has been featured in the Washington Business Journal, CNNMoney, the Commercial Property News, and Costar regarding complex exchange strategies. The regional periodical Bisnow on Business deemed James “Mr. 1031″ for his stature in the industry.
From 2005 to 2008, James served as an Adjunct Faculty member at George Washington University in their MBA Program teaching real estate development case studies. James resides in Alexandria, Virginia, with his wife Shelley and puppy Kona.
www.1031esgroup.com
How MUCH LONGER CAN Obama HIDE the FACT that he PLANS TO INCREASE the TAX TENFOLD on the MIDDLE CLASS?
The bottom line is this: You cannot run a progressive government of the kind Obama favors by collecting only 18 percent of the gross domestic product in taxes, which has been the norm over the past 40 years. Nor can you increase the tax take to 24.5 percent of GDP — which is what Obama proposes to be spending in 2019 — simply by making the rich pay more.
We’ll be doomed. That cap & trade garbage if it passes will cost EVERYONE dearly!!! . We’d better hope people are smart enough to NOT vote for that cap & trade scam and health care garbage. They say starting cost will be $750 for a person making $15,000–that’s just to start. Also I heard that if that does go thru, before you sell your home, feds will inspect it and make sure it meets their energy standards, like all double-paned windows, high efficiency furnaces, etc. (who can afford that?-seniors living on fixed income?) Everyone should email their senators and tell them you don’t want it–it hinges on them, and it’s easy to find and do–please do it!!! EVERYBODY has to fight it, for their own good, the money will just to into Gores pockets.:
http://www.senate.gov/general/contact_information/senators_cfm.cfm
When Colin Powell starts questioning what 0bama’s doing, you know we’re in trouble!
http://www.washingtontimes.com/news/2009/jul/03/powell-airs-doubts-on-obama-agenda/
**Edit: Check this out under “Ingoring Economic Plan”:
http://www.heritage.org/Research/EnergyandEnvironment/wm2503.cf** #2 Edit: just found this in the “Drudge Report” (great info site!), the health care bill may be dead!–yeah!!!
Sr. Tax Manager – product tax
Morning business news – March 1
CRH says its profit before tax for last year was €534m, down from €732m the year before.