A provision in a tax bill signed in December 1999 by President Clinton has changed the way “accrual method” businesses are taxed on asset sales. This change, if left un-reversed, will cause SERIOUS problems to every agency asset sale beginning January 1, 2000.
In the past, when an agency corporation sold some or all of its assets (i.e. its book of business) instead of its stock, the sale often included a down payment and several years of installments. The seller would pay taxes only on the profits accrued by the installments in the years they were received. For instance, if an agency started from scratch and was sold for $1 Million with $100,000 down payment and $100,000/year for nine years (plus interest), the seller would be responsible for $100,000 of taxable capital gains each year (plus the tax on the interest received).
The tax law change would require the seller to pay tax on the full $1 Million of gain in the year that the sale was made.
The obvious ramification is that much more up-front cash would be needed to provide for the tax due in the year of the sale. The alternatives would be stock sales and tax-free exchanges in place of cash sales.
The National Federation of Independent Businesses indicates that lobbyists will try to reverse the rule because of the serious ramifications it has on small business sales.