There can be significant tax implications on selling a business. Inevitably, you will pay taxes on the income of the sale, but there are some ways to minimize your taxes on selling a business so you can keep more in your pocket.
Before we launch into different tax issues to consider when selling, the first step is to get a business valuation. This will tell you how much your business is worth. A business valuation not only calculates the value of your business to help you set your price, but it also serves as an estimate of how much you may owe in taxes on the back end. You can help lighten the tax load with some smart planning.
Depending on how your current business is set up, you can structure the sale to your advantage. Here are four important things to consider:
Taxes On Selling A Business: 4 Considerations
1. Capital Gains or Ordinary Income
The IRS does not see the sale of a business as a single asset. More often than not, your business will be separated out as individual assets which will either be tangible (such as real estate, inventory, and machinery) or intangible (such as goodwill and trade name). This collection of assets will be taxed differently.
- Assets seen as ordinary income will be taxed according to the taxpayer’s rate. Ordinary income and short-term capital gains are taxed the same. Keep in mind that the top federal income tax is 37%. Assets such as inventory and accounts receivable will be seen as ordinary income.
- If you are selling an asset that you have had longer than one year, it counts as long-term capital gains. The current maximum tax rate on capital gains is 15%.
These taxes on selling a business can be significant depending upon whether your business assets are seen as ordinary income or capital gains. This is why the allocation of assets is a very important part of negotiations of the business sale.
The IRS has its list of rules to be followed in your negotiations, which can be found here. Additionally, here is the IRS tax document where you can allocate the purchase price of the assets after it is negotiated between you and the buyer.
2. Installment Sale
You can also manage your taxes on selling a business through an installment sale. This is when you receive at least one payment a year past the sale date, which could help you as the seller to break up the tax load.
Keep in mind that you can only apply an installment sale to capital gain income. For assets seen as ordinary income, such as inventory, assets owned less than a year, and receivables, you must pay taxes in the year of the sale.
You may review IRS form 6252 for more information.
3. Stock Sales and Exchanges
If your business is set up as a corporation, you can minimize your taxes on selling a business by structuring the transaction as a stock sale. This applies to either a C-Corp or an S-Corp, where the buyer could acquire ownership of your business through buying stock.
A tax free option for selling your business is through exchanging stock. The buyer could acquire your business by exchanging stock in his or her own company for stock owned in your business. The amount of stock exchanged must be 50-100%.
4. Get Advice From The Experts
Lastly, and perhaps most importantly, set up a complimentary consultation with us. At Viking, we are not CPAs, but we are seasoned professionals in the buying and selling of businesses. There are quite a few more considerations that can greatly influence the sale of your business, like knowing your state taxes and the benefits of selling to employees or family. This knowledge and experience can help you make sound decisions. We know it can be intimidating to navigate all of the aspects and implications of selling your business. We are here to help make sure each step is the right one, ensuring a smooth and smart sale.
- LLC vs C-Corp vs S-Corp: Choosing a Business Structure
- Year-End Tax Planning for Business Owners
- The Most Important KPI For Your Business