Sterling Accounting Group407-581-6705

Your Due Diligence Specialists

I. Asset Allocation

II. Depreciation Recapture

III. Capital Gains

Please Contact Us

With Any Questions

Agreement between buyer and seller on how the purchase price

will be allocated for tax purposes

Purchase price for allocation – Cash plus liabilities assumed

(notes…)

Agreement to be signed by both buyer and seller

Closing agent/attorney usually furnishes

Asset Allocation

Asset classes

(Assume Asset Purchase)

Class Applies Tax Issue

Class I – Cash No

Class II – Marketable Securities No

Class III – Accounts receivable No

Class IV – Inventory Yes Ordinary income

Class V - All other assets Equipment Yes

Ordinary income (recapture)/Capital Gains

Class VI – Goodwill Yes Capital gains

Buyer = Ordinary income = Inventory and equipment

Seller = Capital Gains = Goodwill

Rate Single Filers Married Joint Filers Head of Household

Filers

10% $0 to $8,925 $0 to $17,850 $0 to $12,750

15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600

25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450

28% $87,850 to

$183,250

$146,400 to $223,050 $125,450 to $203,150

33% $183,250 to

$398,350

$223,050 to $398,350 $203,150 to $398,350

35% $398,350 to

$400,000

$398,350 to $450,000 $398,350 to $425,000

39.6% $400,000 and up $450,000 and up $425,000 and up

Prior Depreciation taken on equipment is taxed at regular (ordinary rates)

Recapture rate is sellers ordinary tax rate (25%, 28%, 33%..)

Loss of capital gain to the extent of prior depreciation

Significant on businesses with lots of equipment that has been fully depreciated

High recapture industry – Landscaping, Restaurants

Low recapture industry – Pool cleaning, Property management, Professional services

Have Seller Call Accountant

Depreciation Recapture

Summary

Depreciation Recapture Example

New Capital Gain and Ordinary

Tax Rate2013 Tax rate changes

New 39.6% tax rate for income over $450,000 (MFJ)

Only applies to income over $450,000

Capital gain rate changes

Increases to 20% for income over $450,000 (MFJ)

If income over $450,000 – all capital gains subject to higher rate

Obama Care Investment Tax

Obama Care 3.8% investment tax

Tax on investment income on income over $250,000 (MFJ)

Capital gains, dividends, interest, passive partnership and S corp income

If income over $250,000 all investment income subject to tax

Tax Strategy

Problem

Year of sale, large increase in income could trigger all of these additional

taxes

Strategy

Instalment sale – Spread gain over multiple years

Seller pays tax as he collects payments. Could result in not hitting

higher tax rates

Instalment notes may not be pledged as collateral

Facilitate your deals with seller holding paper

Advise seller to discuss tax situation with his CPA

Starting point of 39.6% rate

Filing Status 2013 2014

Married filing jointly

and surviving spouse $450,000 $457,600

Heads of households $425,000 $432,200

Unmarried

Individuals $400,000 $406,750

Married filing

Separately $225,000 $228,800

Long Term

Capital Gain Rates

Tax

Bracket

Income up

To

(MFJ)

Long Term

Capital

Gains Rate

Obama Care

Investment

Tax

Total

Rate

15% $72,500 0% 0% 0%

35% $450,000 15% 0% 15%

39.6% $450,000 and

up

20% 3.8% 23.8%