Q: In the past, you have talked about buy-sell agreements. Is there a “best way” to value a business for purposes of a buy-sell agreement?
A: Unfortunately, for business owners, there is no one size fits all method of business valuation. Each business is unique in it’s operations, investment, and finances, etcetera. The subject is often subject to litigation in court; therefore, it is often best to pick a method during the creation and drafting of the buy-sell agreement.
Q: I am selling rental property which I have owned for many years. However, I have not taken a depreciation deduction for the property during the time I have owned it. What will my taxes be on this exchange?
A: When selling depreciable property, you are required to recapture and pay ordinary income taxes as required by law on depreciation taken or allowable. This means that even though you may have not claimed a depreciation deduction (thus paying higher taxes), you must still pay ordinary taxes to some extent in addition to the capital gains taxes due. To solve the dilemma, the IRS allows you to amend you tax return for up to 3 tax years. If you have not taken depreciation beyond 3 years, taxpayers can file for a change of accounting method to adjust for not taking depreciation on the rental asset.
Q: How does the situation proceed when a named person in a buy-sell agreement cannot produce the cash necessary to purchase a named interest in a company ?
A: When the named purchaser in a buy-sell agreement does not or cannot come up with the necessary cash to purchase the business interest, severe consequences can follow for the business. Ultimately, the business can be broken up or its profitability can be affected to a large extent. Therefore, it is important to provide for flexible terms in the buy-sell agreement so the purchaser will have more options and less of a chance for the buy-sell agreement to fail.
By: Basi & Basi at the Center for Financial, Legal and Tax Planning for Transworld M&A Advisors