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Dunn Lambert, LLC | Attorneys At Law

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In New Jersey And New York call
201-957-0874

Dunn Lambert, LLC | Attorneys At Law

Comprehensive Legal Services For Businesses

In New Jersey And New York call
201-957-0874

Dunn Lambert, LLC | Attorneys At Law

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Business Law Professionals

What are the tax implications of a business divorce settlement?

On Behalf of | Oct 16, 2024 | On behalf of The Business Divorce Institute |

Business divorce settlements can be complex, especially when it comes to taxes. It is essential to understand the tax implications of splitting assets and compensating business partners. 

Knowing how taxes impact the settlement can help ensure both parties make informed decisions during the process.

Capital gains and asset transfers

When dividing business assets, capital gains taxes may apply. If one partner buys out the other’s interest, the selling partner may face capital gains taxes on the transaction. The amount of tax depends on the appreciation of the business assets since the time of purchase. 

Understanding the potential tax burden is important for both parties to avoid surprises when finalizing the settlement.

Tax treatment of buyouts

In some cases, a business divorce involves one partner buying out the other’s shares. The tax treatment of this buyout can vary depending on the structure of the business and the nature of the transaction. For example, if the buyout involves installment payments, the selling partner may need to report the payments as income over several years, which affects their tax liability. Proper planning can help both parties manage their tax responsibilities effectively.

Deductibility of legal and professional fees

Legal and professional fees are a significant part of any business divorce. In New Jersey, these fees may be deductible depending on their purpose. If the fees are directly related to maintaining or protecting income, they might be deductible. However, personal expenses or fees related to ownership changes may not qualify for deductions. Consulting with a tax professional is necessary to determine which expenses can be deducted.

Understanding the tax implications of a business divorce settlement is important for avoiding unexpected costs and making informed decisions.