"I have been running a successful online company -- a limited liability company -- for several years, with a number of different lines of business. Another company has made an offer to buy one of my lines of business for a very attractive price, and I'm inclined to accept.
The problem is taxes. My accountant is telling me that the purchase price for this line of business will be taxed to me at long-term capital gains rates, which I understand to be about 20 percent in my case. The buyer, however, is telling me that the purchase price will be taxed to me at ordinary income rates, which in my case would be about 35 percent.
I'm a little nervous that the 'pros' don't seem to be able to agree on this, as there should be a black-or-white answer, right?"
When it comes to taxes, nothing, and I mean NOTHING, is black or white. There is always an exception to every rule, and an exception to each exception, and often an exception to each exception to each exception.
How you will be taxed depends on whether the sale of your business is structured as a sale of assets or a sale of equity (your membership interest in your LLC). If you are selling the assets of this business (which is how most of these sales are structured), and assuming you have been operating this business for more than one year, your accountant is mostly right: The bulk of the purchase price should be treated as long-term capital gains and taxed at the lower rate.
There are, however, some exceptions. If you are selling inventory (for example, if the business is an eBay Store), that portion of the purchase price that is allocated to inventory -- more on that later -- will be taxed to you at the higher ordinary income rates. Also, if you are giving the buyer a noncompete agreement (basically agreeing that you won't go back into that line of business for a couple of years), that portion of the purchase price allocated to the noncompete agreement will be taxed to you at ordinary income rates as well.
If you have taken depreciation on certain assets in excess of so-called "straight line depreciation," you will have to recapture that excess depreciation and pay tax on the recapture amount at ordinary income rates. Because an LLC is a "pass through" entity, all of the tax would flow through to your personal tax return.
The concept of "allocation" is a tough one for folks to wrap their brains around, but it's really very simple. When you sell or buy the assets of a business, you are buying a "bundle" consisting of different types of assets -- equipment, inventory, intellectual property (such as a trademark or trade name), interests in real estate, automobiles, accounts receivable, and so forth.