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Capital Gain or Self-employment tax


JackieCPA

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I have a client who was part owner of an S-Corporation - he sold his share of stock for $1. There was another part of income he will be getting over the next 10 years or so - the contract words things, in my opinion, weird. I am to the point that I am unsure if I should consider this capital gain/installment sale or self-employment taxable commissions receive. I'm not sure if it is me who is just burnt out from the year that I am confused, or if it really is confusing wording. Any thoughts would be appreciated. 

Here is a couple snip bits from the contract:

1. Purchase agreement: The purchase of the business will be as a percentage of commission based on the accounts in Sellers's "books of business." The accounts are listed under section 5. The payments will be as follows:

June 2021: Purchaser 70% of net commission, Seller 30% of net commission and purchaser pays 100% of office expenses.

Every subsequent month: Purchaser 80% of net commission, seller 20% of net commission and purchaser pays 100% of office expenses.

Commissions paid to seller are net commissions after fees from brokerage clearing firm and before any expenses.

2. Duration of Agreement:

Beginning 6/1/2021 the agreement will be set on the terms above for 120 months, ending 6/1/2031 or when ended on the buyout agreement outlined below

If by the 6th year of the agreement, the buyer has paid the seller $120,000 or more in commissions, the contract is terminated, and the buyer no longer has any obligation to the seller.

If at the 6 year mark, the buyer has paid less than $120,000 to the seller, he can pay the difference between what has been paid and $120,000. At that point, the contract is terminated, and the buyer has no longer any obligation to the seller. 

3. Non-Compete Agreement:

Seller shall not compete, either directly or indirectly for a period of 10 years and within 70 miles.

20% of the above purchase agreement will be allocated to the non-compete agreement.

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I would treat that as an outright installment sale with the total purchase price of $120K broken down as sale of business $96K and noncompete of $24K. It's just that the yearly payments are based on what the purchaser is able to retain and collect.

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IMHO the socalled commissions should be split between stock purchase price and non compete agreement, 80/20.

The commission terminology is just a way of defining how much will be paid.

Sometimes the purchase/sale of accounting/tax practices use % of retained fees  as a way defining how much.

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