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Capital Gains Pain

New legislation hurts both buyers and sellers of businesses.

This story appears in the June 2000 issue of Entrepreneur. Subscribe »

Entrepreneurs trying to sell businesses are running into problems, thanks to legislation passed by Congress in 1999 at the Clinton administration's behest. Now, because of heated protests about the bedeviling bill, Congress has uttered an "oops" in the form of a House bill reinstituting use of the installment method for accounting for the income earned from the sale of a business.

Last year's Ticket to Work and Work Incentives Improvement Act requires S and C corporation owners to pay a capital gains tax upfront when they sell their business, if they're accrual-basis taxpayers and regardless of when they received proceeds from the sale. Bank lending is typically unavailable to a buyer, who generally takes a loan from the seller. The installment method allows the seller to record those loan repayments as he or she receives them over a period of years.

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