No matter where you live or what type of business you are in, there is always wisdom to be gained from speaking with a tax professional – especially when it comes time to sell your business. Sure, there is plenty of sound advice available on the subject of “tax considerations when selling a business”, the best way to avoid a surprise tax bill is to speak directly with a professional business tax accountant.
That being said, there are some basic ideas to consider when you structure your sale, since you never know how quickly things will progress with an interested buyer.
Your Tax Considerations When Selling a Business
Here are some of them:
- If you conduct business through a separate “entity”, as opposed to individually, then this will affect the structure of the sale.
- Will you receive the payment for the business in a lump sum or in a series of seller-financed installments?
- Is any part of the purchase price being allocated to you as compensation for your future consulting work, or as payment for your employment?
- If the sale is being structured as an “asset sale” then how is the sale price going to be allocated between the various categories of assets?
When it comes time to pay taxes on the proceeds, the factors outlined above will determine which of the four predominant tax rates will apply to the sale.
These include:
- Ordinary tax rate
- Long-term capital gain rate
- Real estate depreciation recapture rate
- Corporate income tax rate
Each of these tax rates applies to different types of businesses in different ways, and they can change quite a bit from one year to the next. To make sure you are taking advantage of all the tax savings for which you are eligible, a tax accountant may advise you to restructure your business accordingly.
For example, to avoid paying both corporate income tax and individual income tax on the sale of your business, it may make sense to transition your business from a C corporation to a Sub-chapter S corporation prior to the sale. This is just one of many tax considerations when selling a business, but a tax accountant will give you plenty things to consider.
Summary
You should know what the tax considerations are when selling a business are such as: whether you will conduct business through a separate “entity” or individually and the mode of payment, whether it is in a lump sum or installment. Also is part of the payment allocated to you as compensation or employment; and is it an asset sale? The answers to these questions will determine which tax rates will apply to the sale you are contemplating. So you do need to consult a tax accountant before moving forward with selling your business.
About the Author Since 1980 H. Andy Anderson has been in the “business of business.” Andys company, Affiliated Business Consultants specializes in bringing Business Buyers and Sellers together.
Visit the Affiliated Business Consultants website to experience businesses for sale by owner (FSBO) on the Internet. Listed by state and updated daily http://www.bizsale.com
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