Taxes and Selling Your Business

Guide

A Guide for Business Owners

In a Nutshell
  • Minimize Tax Burdens: Explore strategies to minimize capital gains taxes,ย depreciation recapture,ย and potential tax liabilities when selling your business.
  • Maximize After-Tax Profits:ย Learn how to utilize tax-saving strategies like installment sales and basis adjustments to maximize your profit from the sale.
  • Consult a Tax Professional:ย Understand the importance of seeking professional tax guidance throughout the sales process to ensure optimal tax planning and compliance.

As business brokers, it is our job to highlight potential risks and concerns to our clients. The most important take-away is to recommend that our clients get professional advice in each relevant field. Here are some top-of-mind tax considerations worth sharing with business owners.

1. Capital Gains Tax:

  • Implications for Business Owner: Profits from the sale of a business are subject to capital gains tax. The rate depends on the holding period of the business (short-term or long-term) and the owner’s individual income tax bracket.
  • Summary: Minimize the holding period to qualify for lower long-term capital gains rates. Consider structuring the sale to spread proceeds over multiple years if facing a high-income year.

2. Depreciation Recapture:

  • Implications for Business Owner: Depreciation claimed on certain assets over time can be recaptured as ordinary income upon sale. This creates a higher tax burden than capital gains.
  • Summary: Accurately track asset depreciation and consider selling depreciated assets separately to minimize recapture.

3. Installment Sale Election:

  • Implications for Business Owner: Allows spreading sale proceeds and tax payments over multiple years, potentially delaying a large tax liability.
  • Summary: Useful for larger transactions and clients facing high-income years. Requires specific contract terms and IRS approval.

4. Basis Adjustments:

  • Implications for Business Owner: The seller’s “basis” (original cost plus improvements) in the business affects the taxable gain/loss. Expenses like renovations can increase basis and reduce taxable gain.
  • Summary: Document all allowable business expenses and basis adjustments to minimize taxable gain.

5. Section 121 Exclusion:

  • Implications for Business Owner: Up to $250,000 ($500,000 for married couples filing jointly) of capital gains on the sale of a “qualified small business” can be excluded from taxable income.
  • Summary: Applicable to certain small businesses owned for at least five years. Allows significant tax reduction.

6. Passive Activity Loss Limitations:

  • Implications for Business Owner: Losses from a business not actively participated in may be limited in deducting against other income.
  • Summary: Ensure active participation in the business to utilize potential losses for tax benefits.

7. State and Local Taxes:

  • Implications for Business Owner: State and local tax rules governing business sales and capital gains might differ from federal rules.
  • Summary: Consult with a tax professional familiar with state and local tax laws for accurate guidance.

8. Tax Implications of Different Sale Structures:

  • Implications for Business Owner: The tax consequences can vary depending on whether the sale is structured as an asset sale, stock sale, or merger/acquisition.
  • Summary: Understand the tax implications of different sale structures before finalizing the deal. Consult with a tax advisor for complex transactions.

9. Recordkeeping and Documentation:

  • Implications for Business Owner: Maintaining meticulous records of business operations, expenses, and sale documentation is crucial for accurate tax reporting and potential IRS audits.
  • Summary: Implement an organized recordkeeping system and retain all relevant documents for at least seven years after the sale.

10. Seeking Professional Advice:

  • Implications for Business Owner: Navigating complex tax rules surrounding business sales can be challenging.
  • Summary: It’s crucial for business owners to seek guidance from a qualified tax professional throughout the selling process to ensure optimal tax strategies and compliance.

Remember, this information is general and does not constitute tax advice. Please consult with a qualified tax advisor to discuss your specific situation and receive personalized guidance.

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