Almost everything sold is taxed, and businesses are no exception. When businesses are sold, the amount of taxes that need to be paid can be staggering, even if it’s a small business. This is especially true when the seller doesn’t understand the tax implications for the sale or isn’t prepared with ways to reduce their tax liabilities. Below are a few considerations to be aware of when it comes to taxes and selling a business.
Capital Gains Versus Taxable Income
According to the IRS, a business sale is a sale of the assets held by the business. Each asset is taxed separately because the IRS counts it as a separate sale. Any long-term assets, those held for more than 12 months, can be taxed as if they’re capital gains. This means the tax rate will be around 15%.
Any assets purchased less than 12 months before the sale are considered income when they’re sold, so they can be taxed at the seller’s tax rate. Depending on their income, this could be more than double the rate for capital gains. This is important to understand during negotiations, as the buyer may want more items allocated as ordinary income instead of capital gains.
The Deal’s Structure Matters
The type of business being sold, whether it’s a corporation, LLC, or a different type of business, can make a difference in how taxes are paid and how much the seller will owe. If a corporation is being bought by another corporation, for instance, it’s possible to do a tax-free merger in some situations.
For an LLC or sole proprietorship, the company itself won’t be taxed separately from the seller, and the seller won’t need to file a separate tax return for commercial income. This could be one way to reduce the amount of taxes paid, even if the taxes are paid as personal income since they will only be paid once.
Methods Exist to Reduce or Defer Taxes
For sellers, there are a few ways to reduce or defer taxes. As mentioned, merging corporations could lead to no taxes being paid at all. For other situations, sellers will want to negotiate how the assets will be handled and have as many as possible counted as capital gains.
There’s also the possibility of making installment payments on the sale of the business. While this can be risky, the seller can defer the taxes until the installments are entirely paid off. Plus, the seller can charge interest on the installments, which can help offset the amount paid toward taxes.
Tax implications for business sales are complicated, so sellers will want the right help from the start. Since the decisions made during initial negotiations can impact the sales, anyone interested in selling a business will want to get more information from CGK Business Sales before they go any further.
By working with an experienced broker, sellers can learn more about how each decision may impact the taxes they will have to pay and what they can do to reduce their tax liability for the sale.