Tax Liability of the seller when payments are deferred (using Seller Note)
February 26, 2021
by a searcher from Carnegie Mellon University - Tepper School of Business in San Jose, CA, USA
The target here is a C Corp and a portion of the purchase price is being paid in multi-year installation using seller note. Does the seller have to pay tax on the asset allocation part of the purchase price right away or in the future as and when they receive installations?
For example, assume the purchase price is $1M, and 50% paid as seller note over the next 5 years ($100K each year) and asset/goodwill allocation is $800K/$200K. Will the owner need to pay the tax on full $800K on sale or proportionately now and later as they get paid over the next 5 years?
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
The seller should consult their own tax advisor on the tax treatment of the sale. While the installment sale rules appear simple, there are a lot of factors to consider, both tax and non-tax on whether to elect to use the installment sale method. The election by the seller does not impact the buyer.
If this is the sale of stock, the installment sale election will defer the capital gain until the years when payment is received. Note that the stock basis and capitalized transaction costs to sell are also deferred to match the timing of the proceeds.
If this is an asset sale, the installment sale election will not defer any ordinary income (e.g., depreciation or amortization recapture, other ordinary income items, cash basis taxpayer items like A/R, etc.). Note that the asset basis and capitalized transaction costs to sell are also deferred to match the timing of the proceeds and there are some special rules on how seller treats assumed liabilities. The gain on the sale of goodwill can be deferred, if this is self-created goodwill and not previously acquired goodwill that was subject to amortization. If previously acquired goodwill, and previously taken amortization would be subject to ordinary income recapture in whole or part, depending on the specific facts and any excess section 1231 gain would be eligible for installment sale deferral.
Also, if seller is selling assets, they should want very specific language in the purchase agreement regarding how the purchase price is allocated for installment sale purposes. See Rev. Rul###-###-#### The buyer should not have a problem with this allocation language.
from The University of Chicago in Chicago, IL, USA