Business was closed due to illness with no profit remaining
By Lloyd Lindsay | October 28, 2012
I have sold my business due to illness and will end up with $0.00 or maybe have some small outstanding debts left. Will I be able to get a break on my taxes that I owe?
Lloyd Lindsay answered:
Your answer depends on the type of entity you used to own and operate your business. Depending on your circumstances, you can choose from one or more of the following entities: a proprietorship, partnership, or corporation.
A proprietorship is a business owned by one person who is responsible for its liabilities and is entitled to its profits. For tax purposes, the owner reports all profits, losses, capital gains, and capital losses of the business on his/her personal income tax return. Because the owner and the business are the same, the disposal of the business assets (including goodwill) and any debt forgiveness by its creditors will give rise to taxable income and deductions in the hands of the owner.
If the owner received zero dollars, it appears that the owner would have deductions available. However, any debt forgiveness, will reduce the available deductions, and possibly might create taxable income.
A partnership is a business owned by two or more persons who are responsible for its liabilities and are entitled to share its profits. For tax purposes, the partners report their share of its profits, losses, capital gains, and capital losses on their personal income tax returns. If the partnership chooses to sell all its assets, the disposals and any debt forgiveness will give rise to taxable income and deductions in the hands of the partners.
Unlike a proprietorship, instead of selling individual assets, each partner has a partnership interest that he/she can sell to a purchaser. The is This would give rise to a capital gain or loss in the hands of a partner who sells his/her partnership interest.
A corporation is an artificial person created by law and is separate from its owners called shareholders. For income tax purposes, the corporation reports all its profits, losses, capital gains, and capital losses on its own corporate income tax return. If the corporation sells all its assets, the disposals and any debt forgiveness will give rise to taxable income and deductions in the hands of the corporation. Where the corporation is unable to repay loans and advances it owes a shareholder, he/she would report a capital loss or an allowable business investment loss on his/her personal income tax return. A taxpayer can apply capital losses only against capital gains, but can apply allowable business investment losses against all taxable income.
Instead of selling the corporationsвЂ™s corporationвЂ™s assets, the shareholders may choose to sell their own shares to a purchaser. By doing so, they may realize capital gains, capital losses, or allowable business investment losses that they must report on their own personal income tax returns.
Complex tax rules apply to the sale of a business. And for this reason, the vendor should consider using the services of a tax professionalвЂ”even if the proceeds were zero dollars.