All's Fair In … The Law?

Entrepreneur, March, 2001

A change in taxation legislation makes selling a business a better deal.

There's good news for entrepreneurs who want to sell their companies using the installment sate method of accounting. Congress passed and President Clinton signed legislation that reverses the consequence of a previous law that unfairly restricted the method's use.

Under the earlier law, business owners who sold their businesses were required to pay capital gains taxes on the entire selling price, even if they hadn't actually received the money from buyers who were paying off the purchase in installments. Under the change, sellers will only have to pay taxes on the money for their business in the year it's actually received.

Before the legislation was passed, people who had counted on selling their business to finance their retirement, for example, were left with two tough choices, says Joel B. Goldhirsh, a wealth management advisor whose Irvine, California-based firm, Goldhirsh & Goldhirsh, provides financial advice to entrepreneurs, among others: "They had to either pay the tax in advance of actual receipt of the entire sales proceeds, or they could look for an all-cash buyer--at a significantly reduced sales price." The new law, says Goldhirsh, restores common sense and fairness to taxation of the business sales that take place every year.