The reinvestment reserve and reinvestment scheme

When selling your online business, you will hopefully make a book profit. Depending on the method of transfer and the legal form of business you undertake, the IRS will want to settle on this book profit. However, there is a way to delay and even limit this settlement. In this article, we explain the reinvestment scheme in more detail. 

Book profit

When you sell your company by means of a share transaction (B.V.), you usually benefit from the participation exemption. You do not have to settle with the tax authorities for any profit on the sale. When operating as a partnership or sole proprietorship, you transfer your online business through an asset transaction. And in contrast to a share transaction (B.V.), you do not then enjoy this exemption but The tax authorities will then want to settle with you over any book profit you have made with the sale.

This book profit is the difference between the price the buyer pays for your online business (the price) and the value of the assets on your balance sheet (the book value). 

(If a B.V. is not transferred as a whole, but only an activity such as a online business, then there is also an asset transaction and book profit).

The book profit reinvestment through reinvestment reserve

To realize this book profit, you probably had to work hard. If there are schemes, to defer or limit the payment of this to the tax authorities, then it is worth considering! The scheme you could look at is the reinvestment scheme.  By making use of this scheme, you can defer taxation on book profits by reinvesting. You establish a reinvestment reserve, as it were, with this scheme.

The best way to evade this tax is by selling through a share transaction, but for this it is usually too late when you are already moving towards a deal. There is the possibility of transferring a company (sole proprietorship or partnership, for example) to a B.V. via a so-called silent contribution. You then benefit from the participation exemption when selling, but you have to wait until 3 years after the contribution before this arrangement also applies to you!

Set up reinvestment reserve

Setting up a B.V. purely to benefit from the participation exemption in the short term is therefore not an option. What is possible is to incorporate a B.V. in the same way (within one year) and to form a reinvestment reserve in this company for the book profits on the assets sold. The tax authorities set conditions for this, but if you meet them, it is possible to deduct this reserved book profit from newly purchased (business) assets for the next 3 years. The result is that you do not have to settle with the Tax Office all at once, but spread over a longer period.

A reinvestment reserve calculation example from the Internal Revenue Service

Suppose the amount of the reinvestment reserve is €5,000. You invest € 30,000 in a new asset. The residual value of this asset is € 10,000. The depreciation is 20% per year. The depreciation per year is then:

  • without 1st write-off on the purchase price: 20% of (€ 30,000 - € 10,000) = € 4,000
  • with 1st write-off on the purchase price: 20% of (€ 30,000 - € 5,000 - € 10,000) = € 3,000

Because you depreciate a lower amount in the following years and therefore will make more profit in those years, you will pay more profit tax in those years. However, we all know that future money is worth less than current money, so this is an interesting scheme to take advantage of if you meet the conditions! 

In conclusion, the advantage of the reinvestment reserve is that you don't have to make a lump-sum tax payment to the IRS, but pay the levies over a longer period of time due to lower depreciation.