Is there a way to reduce capital gains when you sell a resturant.?

Question

I am selling my resturant for a large amount and i hate paying so much in taxes for capital gains. Is there a way to keep from paying so much taxes? Maby like with a trust or something or maby but reinvesting the money or any ideas????
Thank you
Mike

Answer 1

Your question assumes that the restaurant will be subject to the Capital Gains tax. You may want to look at the nature of your investment as there is good a possibility that the proceeds from the sale would be treated as regular business income subject to a higher tax rate than the capital gains rate.

If the deal is already done/decided, and you are looking for some last minute planning ideas, you may be out of luck. The IRS often uses a theory called the Step Transaction Doctrine to collapse a series of steps in a complicated business transaction to get at the heart of the deal and tax accordingly.

One way to avoid paying tax might be to donate the asset to a charitable organization that is exempt under IRC Sec. 501(c)(3) before you sell. Of course, if you want the money for yourself that will not work.

Sorry to be the bearer of bad news. In any event, please check with your tax accountant on the taxability of your transaction as many facts and circumstances could affect how you are taxed.

Answer 2

If you are incorporated, you can take a large payroll bonus to reduce the overall profit for the year of the sale. While it won't reduce capital gains, it will lower your taxable income and thereby reduce the taxes due. There is something called a Section 1031 exchange; which is a tax free "exchange" - one investment property or business for another. The rules are very stringent and the sale proceeds must be marked for a Section 1031 within 45 days of the sale. Then you must spend the money received from the sale of your restaurant on a "like" investment; i.e., another business or investment property. If you do not spend all of the proceeds from the sale, you will pay tax on the difference (boot). Be careful though. A 1031 will only postpone the capital gains until such time as you sell the REPLACEMENT property, for which your basis will be the same as the basis in your restaurant. Uncle Sam will get his money one way or another. Better to take a bonus and put the money in your pocket & have the business withhold the taxes.

Answer 3

An installment sale is another option for selling your business. It is often overlooked one, but it can save you a bit of capital gains grief.

With an installment sale, you ask the buyer for a downpayment and a note covering the balance of the purchase price. You report taxable gains as you receive payments from the buyer, rather than all at once in the year of sale.

You also must report the interest payments you receive on the note as ordinary income. When correctly structured, an installment sale can "freeze" the value of the business at its sale price for tax purposes.

So, if the business continues to increase in value, your estate will not owe taxes on any appreciation generated after the date of the sale.

Answer 4

Please get good professional help. Beware of depreciation recapture. Equipment depreciation and accelerated depreciation accumulated on buildings is taxed like ordinary income, not at the lower capital gains rates. Do you own the restaurant personally or inside a corporation? What about the real estate it sits on? Please consult a qualified professional to know what the tax cost will really be.