I recently sold a website (which I ran for 3+ years) for a large sum and am looking to minimize my capital gains tax on the sale price. My normal costs (outsourcers/software...etc) were all written off as expenses throughout the time that I ran the site. From what I understand I can't include these as part of my basis since they were already written off as regular expenses throughout the years. I'm trying to understand if I can use my time spent building & promoting the site into my cost basis? I spent a significant amount of my time. I did pay myself from the business checking to my personal checking on a regular basis for normal living costs but this was a sole proprietorship, so not sure if that would be recognized as a proper 'salary expense'. I understand this falls under 'sweat equity' but wondering in what circumstances the owner's time could become part of the basis. I would also be looking for a possible consulting call to touch on additional questions. Thank you!
If you spend money with a service provider then your expense is their income.
If you claim that your time over the years was an expense that added to the capital cost of your business, then who claimed that amount as income?
If you try to do this, then a tax auditor may try to look to make sure you claimed these 'expense' amounts as income in those years. My guess is that you didn't.
Capital gains are taxed at lower rates than income.
I'm not a CPA or tax attorney. You may want to verify this advice with one:
It's likely better to face the capital gains tax then implicate yourself potentially in a problem of undeclared income in prior years.
In general you're correct, about not being able to write off time invested as cap gain.
And, in the future run all this by your Tax Preparer, when you start a new venture.
Way easier to optimize taxes in the beginning, than try doing it after a cap asset has sold.
You might pick up a copy of "The Transfer Pricing Answer Book" + also watch the movie "We're Not Broke!"
When you're watching the movie, ignore the point the movies producers are trying to make.
Instead, imagine how you can duplicate what companies are doing in the movie.
Also, you'll get bonus points for writing down every name off signage in the movie (Banks/Attorneys/Consultants), then research services these companies offer + read content they've written about tax optimization.
You won't be able to capitalize the time you incurred and add that to your basis. The concept of "sweat equity" doesn't really exist in a sole proprietorship context.
For business entities taxed as partnership for U.S. federal tax purposes, the company will frequently grant profits or capital interests to individuals that actively participate in the company, without requiring the individual to contribute cash or other property to the company.