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Thinking About Selling Your Business, Think About Waiting Until 2010
– September 15, 2009
If you were thinking about selling your Louisiana based business, you may want to wait until 2010. The Louisiana legislature has been very aggressive in recent years with targeted business incentives - and the 2009 legislative session was no exception. On August 15, 2009, Governor Jindal signed into law Act No. 457 which provides an exclusion from individual income tax for the gain from the sale of a Louisiana business.
Below are some questions and answers that are designed to explain the details of the new law.
Q: Who is eligible for the exclusion?
A: Resident and nonresident individuals that file a Louisiana income tax return are eligible for the exclusion.
Q: How is the exclusion calculated?
A: The exclusion is limited to gains that are recognized for federal income tax purposes.
Q: What types of gains are excluded?
A: The new law specifically mentions "income from net capital gains," so clearly any gains that are taxed at the preferential capital gains rate for federal purposes are excluded. What is not clear is whether the exclusion also includes ordinary income recapture. Since Louisiana law does not have a preferential rate for capital gains, one interpretation is that the use of the phrase "net capital gains" is a generic term for the entire gain associated with the sale of a business. A more narrow interpretation would not allow exclusion for any ordinary income recapture. The Department of Revenue may need to issue a bulletin to clarify this issue.
Q: What about losses?
A: The new law only refers to gains. If you sell a business for a loss, the new law does not apply.
Q: How do you report the exclusion?
A: The starting point for calculating your Louisiana individual income tax liability is federal adjusted gross income. In the year an individual sells a business, any gain is included in federal adjusted gross income. So without the exclusion, a Louisiana resident will pay Louisiana income tax on the gain. The exclusion allows an individual to subtract the gain from federal adjusted gross income. Louisiana law already allows for several other exclusions from income such as U.S. Government interest. These exclusions are reported on Louisiana Schedule E. Presumably, the Department of Revenue will add a new line to Schedule E to report the exclusion.
Q: What businesses are included in the exclusion?
A: The statute refers to the sale of an equity interest in corporations, partnerships, LLCs and other business organizations that are commercially domiciled in Louisiana.
Q: What types of corporations are eligible?
A: Any nonpublicly traded corporation whether it is a C Corporation or an S Corporation.
Q: What is an "other business organization"?
A: Examples of an "other business organization" would be a sole proprietorship or a business trust.
Q: What if I sell the assets of a business, but keep an equity interest?
A: The new law allows exclusion for the gain from the sale of "substantially all of the assets" of a business. So you don't have to sell your equity interest to benefit from the exclusion.
Q: What if my business is located in a different state?
A: The exclusion only applies to businesses that are commercially domiciled in Louisiana. It is the domicile of the business that matters, not the residency of the individual selling the business (see question 1).
Q: What is the effective date of the new law?
A: The exclusion is available for sales on or after January 1, 2010.
As you can see, the new law provides a significant incentive for business owners that are contemplating selling their business. Considering the highest Louisiana individual income tax rate, a business owner can save up to 6% if they wait until 2010 to sell their business.
John Schmidt, CPA
Tax Manager
318.429.2108
jschmidt@hmvcpa.com
John has been providing tax compliance and consulting services to clients in numerous industries going on 18 years. He has extensive experience consulting with issues unique to business owners.
Chris Solomon
Tax Staff
318.429.2112
csolomon@hmvcpa.com
Chris is a member of the tax department in our Shreveport location. He received his Bachelor of Science in Finance from Louisiana State University in Shreveport.