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Tax Aspects of Selling Your Business

Understand Your Tax Liabilities

If you’ve decided to sell your business, you’ve got a lot of decisions to make — and your eventual tax liability may not be at the forefront of your mind. However, since this tax burden could severely cut into your profits, it’s important to consider strategies to preserve your wealth. Here’s a look at what to consider when selling your company.

What to know about capital gains taxes

Your company owns assets — like vehicles, real estate, and machinery — which it uses to make money. When you sell an asset for more than you paid for it, this is called a capital gain. Conversely, selling it for less than you bought it for constitutes a capital loss. If you upgrade or depreciate your assets, you’ll have to adjust the value accordingly when calculating your gain or loss.

If you walk away from the sale of an asset with capital gains, you’ll have to pay taxes on that money. The amount you’ll pay is partly based on how long you had the asset before selling it. It’s considered long-term if the asset was in your possession for more than a year, or short-term if you owned it for one year or less. Short-term gains are taxed just like your normal income, using the same tax rate. The long-term capital gains, on the other hand, are typically taxed around 15 percent, according to Jean Murray, a contributor to The Balance Small Business.

Understanding your assets

When selling your business, it may seem like your company is a single entity for sale. However, that’s not how the government sees it. According to the IRS, the sale of a business is actually the sale of each individual asset. That means you’ll have to figure out the capital gain or loss for every asset. How this is handled will vary according to how each asset is categorized — for instance, buildings are treated differently than inventory. Be sure to keep in mind whether your ownership of each asset is considered short-term or long-term.

Furthermore, not all assets are tangible goods. Murray advises you to also consider costs like employee training and equipment setup when valuing your business. You and the purchasing party will likely have to negotiate this final figure. For an expert opinion, consider getting a business valuation.

Mitigating the tax consequences

Before you sell your business, it’s a good idea to plan what you’re going to do with the proceeds. If you’re looking to defer your tax burden, The U.S. Small Business Association urges you to consider investing those funds in a certified tax-qualified Opportunity Zone. However, you’ll have to make that investment through a Qualified Opportunity Fund. This transaction needs to take place within 180 days of the sale of your business.

The Small Business Association also suggests structuring the sale of your business to include installment payments. All you need is for the buyer to make at least one payment a year after the sale agreement takes place. However, you should also consider the risk that the buyer won’t be able to meet their payment obligations.

For more advice on the tax repercussions of selling your business, consider consulting with an accountant or other tax professional.

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