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Iowa's 10-year business sale tax break

July 14, 2010

The Tax Update is on vacation. In the meantime we are running pieces your correspondent has run in other venues. This item first appeared in IowaBiz.com, the Des Moines Business Record's blog for entrepreneurs.

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What do you need to hold for ten years?

If you run a business in Iowa and it goes well, you might be able to hang in there and stay in business for 10 years or more. If it goes really well, you might be able to sell out for a nice profit. If all that happens, you might get to cash out without paying Iowa tax on your capital gains.

Iowa has a special tax break for for capital gains of businesses when you meet two conditions:

- A 10-year holding period, and
- Ten years of material participation at the time of sale

You can qualify if you sell substantially all of the assets of the business in a single sale, or on any sale of business real estate, such as farmland.

But if you have owned the business for 10 years and you sell, do only the assets that you've held for 10 years qualify for the break? If you bought a new location seven years before the sale, will that qualify? A newly-released letter from the Iowa Department of Revenue says it does:

The rule does not require each individual asset be held more than ten years. Since the asset was held more than one year, the deduction should have been allowed.

A few other things to keep in mind:

- Holding period rules follow federal holding period rules -- so holding periods of gifted assets, inherited assets and like-kind exchanges go back to the original purchase date.

- "Material participation" is determined under the federal "passive loss" rules. That means for most businesses, you have to sell within five years after retirement to qualify. A special rule allows retired farmers who have 10 years in the business to sell anytime.

- The exclusion is not available for a sale of stock or of a partnership interest, except for gains on liquidation for a corporation that has made a qualifying sale of substantially all of its assets.

- It only applies to capital gains. If part of your gain is from the sale of ordinary income items, like inventory, that will still be taxed by Iowa. This is another reason to pay careful attention to how you allocate your sales price.

Tags: 2010 summer reruns.IowaBiz.com.