Archive for the ‘Asset Purchase’ Category
Websites have become big business and while general business brokers have existed for years, you can find now websites that are dedicated to buying and selling websites. In addition, there are some great podcasts surrounding internet marketing and how to develop your internet footprint but I can’t remember ever seeing anything on the tax implications of buying and selling websites.
This is most likely going to be a four part series. Part one (which you’re reading right now) deals with what happens when the asset (the website) is purchased. Part two deals with when you buy a company that owns a website (i.e. you buy an LLC or corporation that holds a website as one of its assets). I’ve dealt with the differences between an asset purchase/sale and a stock purchase/sale but I’ll touch on the basics of an asset purchase again here. Part three deals with what happens when you buy a website then resell that website at a later date. Part four is going to deal with website dealers, which is someone who creates multiple sites with the expectation of selling them.
Just a disclaimer, this is going to be a general example. Everyone’s tax situation is different so if you’re buying any kind of business (website or otherwise), I highly recommend you consult with a professional.
First let’s lay out some facts and I’ll start by introducing you to “Website Seller.” Website Seller got into internet marketing a couple of years, picked out an idea to write about and his site got some traction. Eventually he was able to monetize the site and he continued to work at it for a couple of years but now he has a fresh idea. Rather than split his time he decides to sell his old website (whether it’s to cash in or just to free up some time for the new venture) so he goes to one of the great website brokerage sites like Empire Flippers (which has a great podcast and website) and Flippa (another great resource with a helpful blog which I believe has a podcast coming soon) and puts his website up for sale. Website Seller gets some offers but he eventually sells his website to Website Buyer for $7,500 (I picked this number to make the math easy). For the sake of this discussion, we’re going to assume both Website Buyer and Website Seller are subject to US income tax and those implications are what I’ll be discussing here.
What Happens to the Seller
Website Seller has a tax event in the year he sells his website. We are going to assume that any costs he’s had with his website including hosting, design and development were taken as deductions in the year they were incurred. That means his basis is zero so the entire $7.500 is a taxable gain. Since he held it for more than one year and he’s not a dealer (more on this later), its classification would be a capital gain and he’ll report it on Schedule D of either his personal return or the tax return of his business entity.
What Happens to the Buyer
Website Buyer is now out $7,500 but he has a website. Not to get to existential but what is a website? You can’t hold it in your hand. There’s nothing “physical.” You can see it, but it’s just bits on a computer screen. What you own is called an intangible asset. When you buy an intangible asset in an asset purchase, you’re allowed to amortize the cost over fifteen years. In this case, you’d get $41.67 a month in amortization deductions or $500 a year (if it’s a full year). If the site was purchased on July 1, you’d get $250 of amortization expense in years one and sixteen and $500 in each year in between.
This is over and above whatever expenses you incur in operating the website. You’d now be required to file a tax return (or form) appropriate to your business entity. If you’re a single member LLC, you’d most likely file a Form 1040, Schedule C each year you operate the website. If you put it into a corporation you’d file either a corporate return or an S-Corporation return.
Form 8594 is required whenever assets are acquired and both Website Buyer and Website Seller will need to attach this form to their tax filing in the year the sale goes down. Part 1 will vary based on whose return we’re talking about (whether it’s the buyer or seller) but Part II should be the same for both sides of the transactions. In a more complicated transaction where several assets are purchased, you might have numbers on each line but in this case, there’s just an intangible asset. Intangible assets (other than goodwill) are Class VI assets so you’d have $7,500 in both columns of the Class VI row.
Whether Website Seller is a dealer is an important distinction. In our example, the sale of the website was secondary to the operation of the website. If Website Seller set up websites, monetized them and then sold and churned them within months, having multiple website sales a year, Website Seller might be considered a dealer. This comes up more in real estate but it basically means you’re a retailer and your product is websites. It changes the characterization of the gain from a capital gain to ordinary income and if you’re operating your business as a single member LLC or without a business entity and you’re filing Form 1040, Schedule C, you’ll also be subject to self-employment tax.
The IRS keeps dealer status kind of grey and doesn’t specifically specify what constitutes being a dealer. My recommendation is to go more with what your intent is. If your intent was to sell the website from the beginning and you’re doing multiple transactions a year, you’ll probably be considered a dealer.
If you’re the seller and you operate your website overseas and you’re a US citizen, you should still be reporting the gain on the transaction on a US tax return. You might not have to pay tax on it but this is something that could have a post by itself. I’ve dealt with overseas investors (mostly in the real estate arena) but I’m not an expert. In a lot of cases, you’ll have to report it both in the country you’re living in as well as on a United States tax return.
If the seller doesn’t receive the full amount of the purchase price at the time of the sale, the seller can elect to defer some of the gain as an installment sale. In this case, the best way to think about it is as if the seller financed the sale with the buyer who is paying some of the purchase price at a later date. I did a blog post on this already so I recommend you go check that out that out in the event of an installment sale.
Buying and selling a website (the asset) doesn’t have really complicated tax consequences but it’s not without its challenges and it does require extra forms for both the buyer and seller. If you have any specific questions, feel free to contact me in your favorite form. If you want to know when Part 2 drops, be sure to like my Facebook page.
Buying a business presents a host of both tax challenges and tax options. Knowing how you buy a business and how it’s going to be presented on a tax return can be just as important as the actual purchase price. As usual, I’m going to talk about things in a general sense. If you’re buying or selling a business, be sure to consult with a professional.
Alright, let’s start with the two types of sales. There are asset sales and stock sales (stock being the shares of a company, if it’s an LLC, it’s not stock it’s partnership units). An asset sale is where the assets of the company are sold where as a stock sale is where the stock or interest in the company is sold. Usually, if you’re the purchaser, you want an asset sale. If you’re the seller, usually a stock sale is the more beneficial. The primary reason an asset sale is better for the buyer (talking strictly from a tax perspective) is that the difference between the value of the assets and the purchase price of the transaction is amortizable goodwill while under a stock sale, that difference isn’t an amortizable expense. Of course a stock sale is usually an easier transaction administratively.
Let’s look at an example. You decide to buy a tanning salon for $30,000. It’s in a good location, it has below market rents for the next few years and the current owner has done a horrible job marketing the company so even though the assets of the company are only worth $20,000, you feel the $30,000 purchase price is a bargain based on the profit you’re going to bring in. Both sides agree on the value of the assets and both sides fill out and agree on a $20,000 allocation to tanning equipment and $10,000 of goodwill on Form 8883 (Asset Allocation Statement). Assuming you’re using a business structure, your business buys the “assets,” begins operating it and come tax time, the $20,000 in equipment is depreciated over a five or seven year life while the goodwill of $10,000 is amortized for tax purposes over 15 years.
Under a stock sale, let’s assume the tanning salon is owned by a company called Tanning Salon, Inc. and it’s taxed as a C-Corporation. For the same reasons above, you decide to buy the company for $30,000. The equipment has a value of $20,000 but it’s depreciable basis is $10,000 because the current owner has taken advantage of some of the more recent bonus depreciation provisions. Your “outside” basis in the stock is $30,000 so if you ever sold the stock in the company, this is what you’d use to compute your gain on the sale. Like in the asset sale example, you’d then start operating the business but now your depreciable value in the equipment is only $10,000 because you stepped into the shoes of the previous owner. There’s no goodwill to amortize under this type of transaction.
The final example has the tanning salon being owned by Tanning Salon, LLC and there are two owners who own a 50% piece of the LLC each. You’re buying out one of the 50% owners for $15,000 and you’re doing it by buying his interest in the LLC. The depreciable basis of the assets is $10,000. Since this company is a partnership for tax purposes and there’s a change in ownership of 50% or more, you’d have what’s called a technical termination. Under a technical termination, the LLC would file a “final” tax return on the date of the purchase (usually a short period return unless the sale happened at the company’s year end) and then there would be a second short period return that would take place from the date of the sale to the LLC’s normal year end date. In the “new” company, all of the depreciable assets would then restart. So you’d have a “new” basis in the asset that consists of the “old” companies purchase price in the asset less any depreciation and you’d depreciate them as if they were just purchased. This one can get messy so if you’re buying out an LLC member, like any of these situations, be sure you’re talking to an expert.
I really didn’t cover “everything” here (there’s entire books on the subject) so if you have a question on an issue I didn’t touch on, just leave me a comment and we can make this a living thread.
Doing a cost segregation study could be a beneficial exercise for a company that owns real estate but the Tax Court recently dealt a blow to those looking at a cost segregation study on assets acquired in an asset acquisition. While usually more beneficial to the purchaser because the goodwill is amortizable for tax purposes, one of the exercises of an asset purchase is Form 8594 which basically makes you pool the assets purchased into buckets based on their character. The Form is then filed with both the seller’s and purchaser’s tax return.
Putting a little extra time into Form 8594 is even more important now because of the Peco Foods Tax Court Case. What the tax court determined was that the allocation done on Form 8594 is binding and that you’re not allowed to subsequently do a cost segregation study on the assets that were purchased. You’re not even allowed to elect a Change in Method of Accounting on Form 3115 to effectuate a change in the allocation so once the Form 8594 is done, you’re stuck.
The moral of the story is, take the extra time to get this allocation done and as much to your benefit as you can. You can usually work with the seller to get a solid allocation done that helps both of you so put in the extra time either during the negotiations or once the sale is getting close to being finalized because the final allocation could have ramifications for years to come.