Tax Aspects of Selling
Remember, it’s not just what you sell a business for, but what you get to keep. Keep these tax planning tips in mind in structuring your sale.
TIP: Some states apply sales tax to the sale of tangible assets. Check with your accountant.
- Long-term capital assets—which can include property or your entire business, are taxed at a lower rate (20 percent) than items such as consulting fees, which must be taxed as ordinary income.
- Selling each of the assets your business owns separately may be beneficial since all assets—goodwill, for example—are not eligible for capital-gains treatment.
- Deferred payments may not be taxable until they are paid, so you may be able to postpone some taxes if you use an installment sale to sell your business.
- Mergers, as opposed to sales where you leave the company, can sometimes be structured as tax-free exchanges. Of course, if you leave the new company later and sell the shares or interests you received, you will probably owe taxes at that point.
Adapted from “Business Owner’s Toolkit,” BizFilings.com, 2001.
"The decisions you made when you set up your business will directly affect the strategies you use when it's time to sell," says CPA Mark Davis, president of Davis & Company in Chicago.
Sellers of C corporations are better off selling stock in the company rather than the company’s assets when they want to retire. A stock sale is considered a personal transaction subject to a 20 percent personal capital gains tax, whereas the sale of assets would be attributed to the corporation and would be taxed at the corporate rate, which is often higher. The seller would then have to pay a personal capital gains tax on the balance realized. If your company is a C corporation, you can minimize the effects of double taxation by taking some of the proceeds of the sale of the business as a personal benefit in the form of a bonus, a non-compete agreement, or a deferred compensation package.
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