How are tax consequences determined for selling and transferring a business over to my wife?

by Dominic T. Cutuli, CPA | Apr 30, 2018
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I invested in a business several years ago, and as part of some restructuring on my end sold that business to my wife for a token $1. This was done without advice, and I am learning that this likely needed to be handled as a gift with a capital gain tax paid to my wife. What is the proper procedure here, and is this needed if the transfer is made between spouses who end up filing a joint return? 

Your question doesn’t include enough details for me to provide a direct response, but I will provide you with some general information related to your question. I would suggest that you contact a CPA directly, so he or she can provide specific advice after reviewing all the facts and circumstances of your situation.

In the situation that you describe, the fair market value of the business you sold would need to be determined at the date of sale. 

  • In many cases, a valuation would be performed by a qualified appraiser to determine this value. A CPA could advise you on what is required in your situation.
  • The difference between the fair market value of the business interest sold and the $1 sale price would be considered a gift to the buyer.

Gifts valued greater than the annual exclusion amount typically require reporting on a federal gift tax return (Form 709). 

  • The exclusion amount would depend on the year of sale, and would probably be in the range of $10,000. You could look this up in the instructions to Form 709 on IRS.gov for the year of the gift.
  • Fortunately, gifts to your spouse are unlimited, so there would be no gift tax liability.

To determine any income/capital gains tax consequences, you would need to gather additional information, including, but not limited to the following:

  • Legal document governing the business, which depends on the type of legal entity. This could be an operating agreement, shareholders agreement, partnership agreement, etc.
  • Legal document related to the sale and transfer of interest.
  • If you don’t have any legal documents, you should probably consult with an attorney as well. There could be legal liability and estate planning issues affected by this transaction.
  • Records related to your purchase of the business interest and any subsequent changes to the basis of your ownership interest (including any debt you guaranteed).
  • The CPA of the business may have maintained this information, so you may want to check with him or her.
  • Any tax documents/reporting provided to your wife since the date of sale.

I also want to point out that you cannot recognize a loss related to a transaction with your wife or another related party.

Generally, a transfer of a business interest between spouses that file a joint tax return would have no federal income tax impact.

  • However, Pennsylvania does track the income of spouses separately, so this transaction could change your state tax filings.

 

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Dominic T. Cutuli, CPA, is a principal with H2R CPA in Pittsburgh.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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