Selling Assets to Raise Cash

I am talking to so many business owners who are taking advantage of these slower sales times by reducing old inventory or furniture and fixtures to raise cash .. Check out the tax advantages...
Selling Assets to Raise Cash
With the recession dragging on for many businesses, there is often a need to raise cash. Selling unneeded assets can be a quick way to do so. However, there are tax considerations to keep in mind. Here are some points to consider:

If you took the Section 179 expense election on the asset in the year purchased, your basis in the asset may be zero. That means anything you receive for the asset would be taxable income. Check your tax return for the year the asset was acquired to determine the amount expensed and your remaining basis. (Most accountants expense the entire cost of an asset, if possible.) You should also be aware that converting an asset on which the Section 179 expense election was made to personal use can result in recapture (immediate income) of at least a portion of the amount expensed.
If you sell tangible personal property that you depreciated, any amount you receive in excess of your basis and up to your original cost will be “depreciation recapture” and taxed as ordinary income. For example, Madison Inc. purchased a backhoe for $60,000 some years ago. It took depreciation of $42,720 on the equipment, reducing its basis to $17,280. Madison sells the backhoe for $40,000. Madison has a gain of $22,720 ($40,000 less basis of $17,280), all depreciation recapture and all taxed as ordinary income. Now assume Madison sells the equipment for $75,000. The total gain is $57,720 ($75,000 less basis of $17,280). All the depreciation of $42,720 is recaptured and taxed as ordinary income, and the amount in excess of Madison’s original cost, $15,000, ($75,000 selling price less $60,000 cost) is taxed as long-term capital gain.
If you acquired the asset by means of a trade-in, your basis will depend on the basis of the equipment traded in as well as any additional cash put up and depreciation taken on the new equipment. This can get complicated. Check with your accountant.
An installment sale of equipment can actually backfire. You must recapture all depreciation in the year of sale, even if you’ll receive payments over time. For example, you sell a machine for $5,000, $1,000 payable up front, the rest over four years. The machine cost you $8,000, but it’s fully depreciated (i.e., your basis is zero). You’ll have $5,000 of taxable income in the year of sale. That could mean paying taxes of $2,000 (at 40%, combined federal and state), while only getting $1,000 in the first year. After taxes, your cash flow would be negative for the first year. (See below for a discussion of an asset with an outstanding liability.)
Selling off obsolete inventory can generate some cash and some tax savings. You generally can’t get a deduction for that inventory until it’s sold or scrapped. For example, you paid $100 for 8 valves. If you accounted for them correctly, you never deducted the $100. Auction them off for $20 for the lot and you’ve got $20 cash and an $80 loss you can take on your tax return. The loss could produce $32 in tax savings (depending on your bracket). If you’re doing an auction or a sale, talk it up and consider selling current goods at the same time.
Talk to your tax adviser. He or she should be able to review your situation and suggest which assets can be sold with the best tax effect.