Harold Aucoin CPA Inc.

Entry into business
Entrance in an industry or occupation is often only attainable by buying an existing business. In this decade a powerful incentive to sell an already incorporated business is ever prevalent because of the “capital gains deduction”. This tax environment is not new but has existed for many years. Businesses that are incorporated can be sold without the seller incurring taxes. In practice this is seldom achieved because the company being sold must be devoid of excess cash. Its cash “clean-up” procedures often attract tax to the seller. However the “cleaning-up” of cash is often less of a tax burden to the seller that a sale of the assets of the company. In practice a continuation of the company selling the business is presumed where the company is selling the assets. Where the assets are sold a recapture of depreciated amounts is tax up to the original cost of the assets with any excess taxed as a capital gain. This tax left to the company can be without a burden where the company intends to purchase other assets or businesses. There are many variations of tax, operating, and legal incentives at work here. These are discussed in subsequent articles.

A seemingly simpler scenario is where a buyer of a business is not buying an existing company (shares) but rather the assets. This has often tax advantages to the buyer because the buyer can often depreciate the assets and thereby reduce taxes. The financing is usually easier because the financial institution sees no impediment to its collateral. Often the only decision prior to closing is whether the purchase will be done via a newly formed company. Subsequent articles expand on this theme and its advantages to the buyer. At first glance the seller’s position seems at a disadvantage when compared to selling the business (assets) as an incorporated entity. However we have often seen where a “tax simulation” leaves the seller in as favorable or better light.