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Posted by Lee on June 21, 2006, 1:51 pm
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Benjamin Yazersky CPA enlightened me by writing:
> I've seen this issue go both ways. It depends on facts and
> circumstances.
Hi and thank you for responding.
> Are you selling software?
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.
> Are you licensing someone else to use it?
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.
> Are you licensing someone else to sell it?
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.
> Are you packaging it with another product or service?
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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Posted by Hank Murphy on June 22, 2006, 2:30 am
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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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<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
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Posted by Lee on June 23, 2006, 3:10 am
Please log in for more thread options > First, over the previous six years, did you capitalize or
> expense your software development costs?
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.
> 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.
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
<< ======================================================= >>
<< 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. >>
<< ======================================================= >>
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Posted by Seth Breidbart on June 21, 2006, 1:51 pm
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> 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.
. . .
> 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.
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
<< ======================================================= >>
<< The foregoing is intended for educational purposes only >>
<< and does NOT constitute legal OR professional advice. >>
<< >>
<< The Charter and the Guidelines for submitting >>
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<< Copyright (2006) - All rights reserved. >>
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Posted by Lee on June 21, 2006, 10:55 pm
Please log in for more thread options Seth Breidbart enlightened me by writing:
> 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.
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
<< ======================================================= >>
<< 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. >>
<< ======================================================= >>
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