Selling or Closing a Business?

[chip3006]

I have a successful company for many years but bought another company a couple years ago.  The company I purchased has been hit hard and has never been profitable.  Long story short, it is not in my interest to invest anymore money into the business to continue keeping it operational.  Rather than doing that, I was planning on closing the business down and using the loss to help offset gains from my other business.  Assuming I can do that?!

Here's the question that I'm hoping I can get help with - an existing employee has asked to sell the business to them.  Since the business is unprofitable and without any assets, they are wanting a sale of essentially $1 as opposed to me closing the doors.  I assume they would then take on all the obligations (payables, leases, etc.).  I know I will discuss specific details around that with a tax advisor but I wanted to know if I can assume the same loss on a sale as I could closing the business down.  

Short summary - I purchased the business for $150k and have never made a dollar.  If I close it down I can assume a capital loss of $150k, correct?  If I sold it for basically nothing to the employee, can I take the same loss?

[M-MTax]

To the extent they "take on all the obligations" your loss will be reduced because you're being relieved of your liabilities. So there is a difference between that and closing down.

[chip3006]

Appreciate that and it makes sense.  Assuming the obligations are $25k, would that mean closing it would result in a loss of $175k and selling and having the new owner assume liability would result in $150k?

[M-MTax]

OK - you can't have a loss in excess of your basis and it looks like your basis would be the $150k you paid for the business. Unless you bought inventory and depreciable property.....I mean assuming you bought just something like a service business.....you would have a capital loss of whatever you paid LESS any liabilities the "buyer" is assuming. Those obligations you're being relieved of will reduce your loss. 

[Critter-3]

A correct answer cannot be given on this public form with the limited info you posted ... there are too many variables so  PLEASE seek local professional guidance in this matter before you sell anything ... a proper contract and the required IRS forms need to be completed so seek a tax and/or business attorney versed in this matter.  If you are ever audited you will need to have your supporting docs in order. 

[Mike9241]

Short summary - I purchased the business for $150k and have never made a dollar. If I close it down I can assume a capital loss of $150k, correct? If I sold it for basically nothing to the employee, can I take the same loss?

what type of entity? other than a C-corporation you should have been able to deduct your losses each year up to a total of $150k.

in a C-Corporation the liabilities are that of the corporation not yours personally (unless you gave personal guarantees which is another issue completely) in this case you close it down you have a $150K capital loss. if you sell it to an employee for $1 you have a capital loss of $149,999 

in other types of entities such as a sole proprietorship or S Corp, you should have been deducting your annual losses (subject to any passive loss limitations. then either selling or closing down would free up any suspended passive losses)

you need to consult a tax pro to make sure you have deducted any allowed losses and determine your tax basis and also the nature of any allowed loss. only $3,000 of capital loss can be used in any year to offset ordinary income. a lot depends on what type of tax entity this business is. they'll be able to tell you what the tax consequences of closing or selling the business would be.  once that is done you should consult a lawyer to draw up or review legal documents concerning the sale.  certain laws, other than tax laws, may need to be complied with like bulk sale law. failure to dot the i's and cross the t's and you can find yourself on the hook for a lot of money down the road.