Financing and Tax Implications of Selling Your Business

Class I assets: Cash and general deposit accounts

All cash that is transferring as part of the sale.

Class II assets: Actively traded personal property

The current-market value of all certificates of deposit, foreign currency, government securities, and publicly traded stock that will be transferring as part of the sale.

Class III assets: Accounts receivable and debt instruments

Accounts receivable, credit card receivables and loans due to your business if those assets are transferring as part of the sale.

Class IV assets: Inventory and stock in trade

The value of inventory and stock, which must be defensible based on cost or fair market value. The buyer may want to allocate as much as possible to this asset class because it qualifies as a deductible business expense.

Class V assets: Tangible/Physical assets

The value of furniture and fixtures, buildings, land, vehicles, and equipment that is transferring as part of the sale. The buyer will benefit from allocating as much as possible to assets in this class, which will qualify as business expenses or to which short-term depreciation rates apply. Conversely, you’ll benefit from allocating as much as possible toward appreciated assets you’ve held long-term, which qualify for taxation as capital gains.

Class VI assets: Intangible assets not including goodwill

The value of the all the non-physical assets of your business (not including goodwill), such as workforce, business books and records, systems and procedures, intellectual property, customer lists, and other assets that the IRS details in Form 8594 instructions (see link on this page). Frequently intangible assets are purchased in return for a non-compete agreement and/or a personal services contract, each of which offer different tax implications. Payment for a personal services contract allows the buyer to deduct the price as a business expense, while it will be taxed as ordinary income on your return for the year the payment is received. Payment for a non-compete agreement must be amortized or deducted over 15 years even if the agreement is for a much shorter time period, making it less attractive to buyers but more attractive to sellers.

Class VII assets: Goodwill and going-concern value

The value of goodwill is determined by math and negotiation. This asset class equals the purchase price minus the amount allocated to all other classes. You’ll want to allocate as much as possible to goodwill because the proceeds will likely be taxed as capital gains.