- quote -

Coding the software is 98% of the costs. The development
tools that I use, I use for all software development, not
just this particular product. I have kept pretty decent
records of my times spent coding the software which averages
about 228 hours a month coding the software. I'm not sure
if personal labor into the product counts, but even a mid
level programmer can be expected to cost 80K a year between
salary, company benefits, matching taxes, etc.

- quote -

90% of our sales are through resellers. 70% of those sales
are through "partner companies". Some are software
companies that have modified their own software to integrate
with ours which I wouldn't say locks them in, but makes
re-tooling to another vendor a very expensive proposition.
Some are just large volume resellers who private label our
software as their own.

It's a mid priced software package retailing for $695.00 per
seat. Some customers require as many as 40 seats per
location while the average sale to an end user averages
about 3.2 seats sold (according to our records).

The offers that we've received have come from our resellers,
competitors and comapnies from parallel markets.

--
Warm Regards,
Lee

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Lee <luv2program2000[at]yahoo.com> wrote:
- quote -

Then by analogy with a similar case in meatspace, I'd say
it's capital gains.

Warning: according to the same analogy, _next time_ it's
ordinary income.

The case I'm thinking of (which I read about many years ago
and don't have a cite for) is a man who started a diner.
After a few years, his wife got transferred to another city,
so he sold the diner as a going business for a lot more
money than he'd ever made running it. That was capital
gains.

In the new city, he opened a diner and ran it for a few
years, then sold it. The IRS ruled (and I believe a court
agreed) that he was now in the business of starting and
selling diners, hence the proceeds were ordinary income.

Seth

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I'd like to make a couple of points which don't seem to have
appeared up to this point.

First, over the previous six years, did you capitalize or
expense your software development costs?

Second, and this is outside the tax part of the discussion,
the valuation of your product in this potential sale seems
pretty good. Normally software companies go for one to two
times annual sales IIRC.

Hank Murphy
speaking only for myself

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Seth Breidbart enlightened me by writing:

- quote -


Thank you for replying.

It would in fact be everything relating to that business.
Software source, customer lists, upgrade revenue,
intellectual rights, supporting products and their sources,
website/domain name, the whole kit and kaboodle.

We actually own two companies one of which, we would keep.
The second company is unrelated to the first one that we are
considering selling.

--
Lee

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Lee <luv2program2000[at]yahoo.com> wrote:

- quote -

You haven't specified exactly what you're selling.

If you're selling _everything_, the code, the copyrights,
the buyer gets any future licensing or upgrade fees from the
current licensees, etc. then I'd say it's capital gains.

The less you sell, the more it looks like ordinary income.

Seth

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Benjamin Yazersky CPA enlightened me by writing:

- quote -

Hi and thank you for responding.

- quote -

I think this is where there is some confusion, at least on
my part. I wrote a business application (and have continued
to refine it over the last 6 years) that I license to
businesses in a specific sector to use. We don't sell
software in the sense that we sell rights to it or
ownership. We sell licenseses which give the licensee the
right to use the software.

We do not sell software in the sense that we are a
contractual software house where customer pay us to write a
software program for them and they keep the rights to the
product.

I'm not sure if this is even a valid distinction, but
thought I should clarify.

- quote -

Correct. We license the software to both end users directly
(about 10% of our licenses are sold to end users) and
through resellers (90%) who purchase the software licenses
from us at a discount, market it up and bit and package it
with a turnkey solution including hardware, support
services, etc.

- quote -

I'm not sure of this one. We allow resellers to resell
software licenses as I explained above. If this is not the
context that you referring to me, please let me know and
I'll rephrase.

- quote -

No. Although, there are other software products that we
also license to customers (that I have written) that support
the first product. As an example, there is an add-on module
that customers can license that provides the main software
with the ability to process credit cards. There's another
that allows entriprise polling and agreggation of data from
multiple stores and is an add-on module that can be licensed
as well.

Thanks for your input. As I mentioned in my response to San
Diego CPA, I know it's impossible to give advise, but some
direction through factual information is always appreciated.

I would be just my luck to be in a situation that is
apparently a gray area, LOL. My dilemna obviously not
knowing how I would be taxed, should I accept the offer.

As it stands right now, I receive about $120K in revenue
after expenses to keep and develop the product. Further,
the product is mature enough that I could actually cut down
on the number of hours spent on adding new features, etc to
20-30 hours a week and coast for quite some time, I think.

If the money that I would get up front is pared down to
about 2-years worth of revenue after federal (35%) and NC
taxes (8%), it hardly makes sense for me to sell,
unfortunately.

Thanks again!

--
Lee

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"San Diego CPA" <gcollect1[at]sbcglobal.net> wrote:
- quote -

Is this true if it is an EXCLUSIVE License?

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San Diego CPA enlightened me by writing:

- quote -

First, thank you for your response. I know that is unfair
and unrealistic to ask for actual advise on an open, unpaid
forum. Factual information as you have provided is really
appreciated.

--
Warm Regards,
Lee

"Upon further investigation it appears that your software is
missing just one thing. It definitely needs more cow
bell..."

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"Lee" <luv2program2000[at]yahoo.com> wrote:

- quote -

I've seen this issue go both ways. It depends on facts and
circumstances.
Are you selling software?
Are you licensing someone else to use it?
Are you licensing someone else to sell it?
Are you packaging it with another product or service?

___________________________________
<<< Benjamin Yazersky, CPA [NJ & NY] > > -----> real address on hobokeni or hobokenx <-----

"This written advice was not intended or written to be used,
and it cannot be used by any taxpayer, for the purpose of
avoiding penalties that may be imposed on the taxpayer."

(The foregoing legend has been affixed pursuant to U.S.
Treasury Regulations governing tax practice.)

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"Lee" <luv2program2000[at]yahoo.com> wrote:

- quote -

Without more background than you provide above, I can see at
least 2 possible outcomes:

1. you sell the product outright, retaining no ownership or
rights to the product or revenue it generates, then capital
gains appears appropriate. Whether it's long or short term
could still be an issue depending on when the software was
first put into service.

2. if you license the software to others (whether
individuals or companies), you'll have ordinary income.
Whether you were (or believed your were or were not) in the
software business before is irrelevant, you will be once you
begin licensing the software to others.

This is a very simple response based on limited facts
provided. There are special (and potentially complex) rules
for self-constructed assets and domestic production
activities, none of which are discussed here. You clearly
need guidance from a competent professional which is seems
you're searching out.

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Sorry, I thought that I had already posted this, but my
newsreader was acting a bit off kilter.

I have a software product that I have developed over the
last 6 years or so. While I have been made offers on it
before, a recent offer is attractive to me and before
considering it, I trying to find out what kind of taxes I
would be liable for.

I've spoken with 4 CPA's today as well as the "complex tax
issues" department at the IRS. 2 CPA's think that it would
be taxed as ordinary income. 2 other CPA's as well as the
IRS guy think it should be capital gains claimed on schedule
D.

While the product itself is software, it is not our actual
business to design and sell software. This is a product
that I developed (I personally have rights on it) and
license for use by other companies.

Having to pay 43% between federal and NC taxes makes the
offer less than viable for me. Capital Gains taxes on the
other hand, I could probably swing the deal.

Any thoughts?

Thank you in advance.

--
Lee

<< ================================================== ===== > << The foregoing is intended for educational purposes only > << and does NOT constitute legal OR professional advice. > << > << The Charter and the Guidelines for submitting > << messages to this newsgroup are at www.asktax.org. > << Copyright (2006) - All rights reserved. > << ================================================== ===== >