Tax Talk is Taxing – Tax Contingencies after Valuation Reports

Most people cringe at the word ‘tax’. Not us, we love it!  We are often asked what the tax impact would be to a shareholder if he or she sold their business.  Calculating the tax impact for the shareholder can ensure peace of mind and ensure the shareholder is aware of all possible tax liabilities when selling.  This is why we love tax, we can bring peace of mind to shareholders when they are looking forward to moving on to the next step of their lives.

Let’s use an example of a flower shop, where the value of the shop was determined to be $300,000.

The owner has two options when selling:

• Sell the assets of the business for $300,000; or
• Sell the shares of the business for $300,000.

Sale of Assets

The owner of the flower shop may sell the assets of the company.  In simple terms, the buyer is paying the seller $300,000 to take the cash in the registers, the flowers in the flower shop, all the displays, and if the business owns the building, then the buyer is taking that, too. The seller is left with bills to pay before keeping the remaining cash in his pocket.

If the buyer is taking the cash in the registers, the flowers in the flower shop, all the displays and the building, there will be tax consequences.  The tax consequences will be business related which means the seller is liable for paying them.  Even after paying the bills, some of the remaining cash from the proceeds will be used to pay the tax liabilities arising from the sale of the assets.

For every asset the buyer purchases from the seller, we calculate the tax impact to the business.  If the buyer takes the cash from the registers, we determine the tax consequence, if the buyer takes the flowers in the flower shop, we determine the tax consequence for that too. Every asset on the balance sheet is looked at to determine the tax consequences.

After paying the liabilities, and considering the tax we have determined, can the flower shop owner can go on vacation with the remaining cash? Almost. There are also tax consequences to withdrawing the remaining cash from the business. We calculate the tax impact for that, too.

It is no wonder that a buyer typically prefers the sale of assets.

Sale of Shares

If the flower shop owner sells the shares, they are selling all the assets and all the liabilities to the buyer. In other words, the keys to the shop are handed right over to the buyer with everything still in the store including the bills on the counter.  It is no surprise that selling the shares of a business is typically preferred by the seller.

Since the sale only involves the shares, we only need to consider the personal tax impact to seller, as there would be no business tax impact.

Selling the shares of the flower shop business can trigger capital gains tax, however, the capital gains on private companies may or may not be sheltered by the lifetime capital gains exemption. Since we love tax, we calculate both options for the seller.

Tax and Valuations

We prepare valuation reports for a variety of reasons, including family law, shareholder disputes, purchase and sale of a business, or estate planning.

At the time of our valuation, the shareholder may not know if he or she will sell the assets or sell the shares of the business. Therefore, if requested, we calculate all scenarios for the shareholder – tax impact upon sale of assets, tax impact upon sale of shares with capital gains exemption, and tax impact upon sale of shares without capital gains exemptions.

We want to ensure your valuation and income tax calculations are coming up roses, so feel free to give us a call if you have any questions!