Can I include my time spent when calculating basis of a capital gain? (M&A)

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!


Hi there,

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.



Answered 7 years ago

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.

Answered 7 years ago

Your time spent on the business is not deductible and does not add to your basis.

Answered 5 years ago

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.

Answered 5 years ago

To understand if you can incorporate time or not, you need to understand the cost structure and capital gains first. Cost basis starts as the original cost of an asset for tax purposes, which is initially the first purchase price. Cost basis is used to determine the capital gains tax rate, which is equal to the difference between the asset's cost basis and the current market value. Tax basis still holds for unrealized gains or losses when securities are held but has not been officially sold, but taxing authorities will require a determination of the capital gains rate, which can be either short term or long term. Although brokerage firms are required to report the price paid for taxable securities to the IRS, for some securities, such as those held for a long period of time or those transferred from another brokerage firm, the historical cost basis will need to be provided by the investor. Determining the initial cost basis of securities and financial assets for only one initial purchase is very straightforward. There can be subsequent purchases and sales as an investor makes decisions to implement specific trading strategies and maximize profit potential to impact an overall portfolio. With all the various types of investments, including stocks, bonds, and options, calculating cost basis accurately for tax purposes, can get complicated.
As stated earlier, the cost basis of any investment is equal to the original purchase price of an asset. Every investment will start out with this status, and if it ends up being the only purchase, determining the cost is merely the original purchase price. Note that it is allowable to include the cost of a trade, such as a stock-trade commission, which can also be used to reduce the eventual sales price.
For example, let us assume Lawrence purchased 100 shares of XYZ for $20 per share in June and then makes an additional purchase of 50 XYZ shares in September for $15 per share.
If he sold 120 shares, his cost basis using the FIFO method would be + = $2,300. There are also differences among securities, but the basic concept of what the purchase price is applied. Typically, most examples cover stocks. However, bonds are somewhat unique in that the purchase price above or below par must be amortized until maturity.
The need to track the cost basis for investment is needed mainly for tax purposes. Without this requirement, there is a solid case to be made that most investors would not bother keeping such detailed records.

The equity cost basis for a non-dividend paying stock is calculated by adding the purchase price per share plus fees per share. Reinvesting dividends increases the cost basis of the holding because dividends are used to buy more shares. The cost basis would be $1,610. One of the reasons investors need to include reinvested dividends into the cost basis total is because dividends are taxed in the year received.

If the dividends received are not included in cost basis, the investor will pay taxes on them twice. For instance, in the above example, if dividends were excluded, the cost basis would be $1,010. As a result, the taxable gain would be $990 versus $390 had the dividend income been included in the cost basis. In other words, when selling an investment, investors pay taxes on the capital gains based on the selling price and the cost basis.

However, dividends get taxed as income in the year they are paid to the investor, regardless of whether the dividends were reinvested or paid out as cash.
A capital gains tax is a tax on the growth in value of investments incurred when individuals and corporations sell those investments. The U.S. capital gains tax only applies to profits from the sale of assets held for more than a year, referred to as “long term capital gains.” The rates are 0%, 15%, or 20%, depending on your tax bracket. Taxable capital gains for the year are reduced by the amount of capital losses incurred in that year. A capital loss is when you sell an investment for less than you purchased it for.
Such gains are added to your earned income or ordinary income. You are taxed on the short-term capital gain at the same rate as for your regular earnings., dividends are taxed as ordinary income for taxpayers who are in the 15% and higher tax brackets. If you're in a tax bracket with a higher rate, your capital gains taxes will be limited to the 28% rate. Real estate capital gains are taxed under a different standard if you're selling your principal residence. After applying the $250,000 exemption, he must report a capital gain of $50,000, which is the amount subject to the capital gains tax. In most cases, significant repairs and improvements can be added to the base cost of the house, thus reducing even more the amount of taxable capital gain. Investors who own real estate are often allowed to take depreciation deductions against income to reflect the steady deterioration of the property as it ages. That in turn can increase your taxable capital gain if you sell the property. That's because the gap between the property's value after deductions and its sale price will be greater. So if the person then sold the building for $110,000, there would be total capital gains of $15,000. Then, $5,000 of the sale figure would be treated as a recapture of the deduction from income. The remaining $10,000 of capital gain would be taxed at one of the 0%, 15%, or 20% rates indicated above. You may be subject to another levy, the net investment income tax, if your income is high. This tax imposes an additional 3.8% of taxation on your investment income, including your capital gains, if your modified adjusted gross income exceeds certain maximums.
Capital losses can be deducted from capital gains to yield your taxable gains, if any, for the year. The calculations become more complex, though, if you have incurred capital gains and capital losses on both short-term and long-term investments.
Then the short-term losses are totalled. Finally, long-term gains and losses are tallied.
The short-term gains are netted against the short-term losses to produce a net short-term gain or loss. Finally, these two numbers, for the short-term and long-term, are reconciled to produce the final net capital gain that is reported on the tax return.
Besides if you do have any questions give me a call:

Answered 4 years ago

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