Capital Gains Tax Question (mortgage, loan, attorney, transaction)

[Mbrwr]

I'm going to give a hypothetical using easy round numbers... and I have a question I hope some of you can answer.

Imagine somebody bought a business 10 years ago for $500,000.00
Time goes by, the business depreciates $250,000.00
The person decides to sell the business for $1,000,000.00
This is $750,000.00 more than the original purchase price plus depreciation.
If I understand it correctly, this person has to pay Capital Gains tax on $750,000.00 of 20% ... or $150,000.00

Now... Is that person done paying taxes on that money, or is Capital Gains IN ADDITION to the regular taxes that must be paid?

ALSO, If that same person had a mortgage on a house and the remaining principal due is $200,000.00 and decided to pay if off using the profits from the sale of the business... Would that person also have to pay tax on the principal paid? Would that tax have already been paid (as explained by the answer from the previous paragraph)?

How would the taxes break down in this scenario?

Anybody have any idea?

Thanks!

[MrRational]

Originally Posted by Mbrwr

Imagine somebody bought a business 10 years ago for $500,000.00
Time goes by, the business depreciates $250,000.00

Ten years implies this was a "going concern" but that overall it didn't do very well.
That what gross receipts it had were chewed up in operating costs resulting in little if any profit.

The person decides to sell the business for $1,000,000.00

Neat trick!
Especially for a set of business assets that has depreciated by 50% over that term.
One might even call such a transaction a "windfall"

(for clarity: this $1M asset being sold...
is it the structure? or equipment? or the entirety of the "going concern"?)

This is $750,000.00 more than the original purchase price plus depreciation.

Indeed it is.
Where is this loss/depreciation you started talking about?

If I understand it correctly, this person has to pay Capital Gains tax on $750,000.00...

The broad Q gets the broad answer: Yes
See 1040 Schedule D.

of 20% ... or $150,000.00

The specific Q gets you referred to the tax attorneys.

Now... Is that person done paying taxes on that money,
or is Capital Gains IN ADDITION to the regular taxes that must be paid?

1040 Schedule C
Learn it well and deeply.

ALSO, If that same person had a mortgage on a house and the remaining principal due is $200,000.00 and decided to pay if off using the profits from the sale of the business...

The plot thickens...

-Would that person also have to pay tax on the principal paid?
-Would that tax have already been paid?
(as explained by the answer from the previous paragraph)?
-How would the taxes break down in this scenario?

The "business" will often file it's own set of returns.
The "person" pays or takes deductions based on what "the business" which they control reports.
(See Sch C and Sch D, 1099, K1, etc)

The value of the principle involved, a business asset, falls under the broad term of "cost basis" for the asset(s) tax value which in turn have almost always "depreciated" (for tax purposes) for many years which gave a very nice "paper loss" to offset the business income against...

(I bet you remember smiling when you got to do this.
You may have even bragged to your wife and golf buddies about how much you were able to 'write off".)

All of these shenanigans LOWERS that cost basis in the company records, the "book value",...
such that if sold later the "paper profit" starts from the lower number.

Hope that helps some.

[Mbrwr]

I did say these were hypothetical numbers....

The business is an LLC (Single Member). As such, it's profit "passes through" me and is reported on my personal tax return. I pay my taxes according to this "Income" at a rate of 33% (according to the 2010 Tax Brackets)

In the above example there would be $750,000.00 on which to pay capital gains... I'd be taxed in the 15% (correction) category... i.e. I'd be taxed on my profit.

That's it, right? I mean, I don't get taxed again at the end of the year at the 33% rate on the profit I made on the sale of the business... I just pay capital gains and that's it, right?

[NJBest]

My understanding is that if the person purchased the business for $500,000 and sold it for $1,000,000, then the person owes capital gains tax on $500,000. Even if the business value depreciated. The person only owes capital gains tax on realized gains. Since the depreciation was never a realized loss, it cannot be considered as part of the net capital gains realized.

[JPAustad]

In 2009 I took out a loan for 55K and bought a business. I sold the business a year and a half later for 47K....8K less than I paid for it. I used the proceeds of the sale to pay back the loan I had taken out.

Do I need to pay capital gains on the 47K or am I able to claim a loss because I lost money on the deal??

[OneTimer-OldTimer]

Originally Posted by MrRational

Ten years implies.....

Neat trick!
......

Hope that helps some.

Always looking for tricks, aren't we? Some don't look at the intent of the tax code. They just look for tricks.