January 30th, 2018 Dominique Molina (Taxloopholes.com Tax Strategist)
Selling your business can be bittersweet. On the one hand, it means that you’ve built up something that’s successful enough someone else is interested in carrying on the legacy. On the other hand, it means the end of an era, the closing of a chapter.
Selling your business also has some implications from the tax perspective. Let’s take a look at some of the tax-related issues surrounding the sale of a business, and what you need to be aware of in order to make the best of the deal:
- Selling a business is a taxable event. The government is pretty good at recognizing opportunities for tax revenue, and the IRS is fully aware of the implications of trying to play games with your taxes during the transfer of a business. You need to start with the assumption that, if you’re selling a business, you’re going to be paying some taxes for the privilege.
- The type of business matters. Selling a sole proprietorship is somewhat different than selling a partnership or a limited liability company. All of those are vastly different from selling a corporation. Generally speaking, if you’ve invested a certain amount in a business and you’re selling the business for more than that amount, the difference is the amount that you’ll be taxed on. You’ll be taxed on that profit at your personal tax rate. Corporations are very different, and in that case you’ll likely be taxed based on the actual shareholder profits that come from selling the business.
- From the IRS perspective, your business is a collection of assets. Those assets might include inventory, it might include equipment, and it might include reputation or “goodwill.” The tax code demands that you assign a value to each asset or each group of assets and that this be reported to the IRS. This is a key factor in determining the net gain or loss for your business. Depending on the area of gain or loss, you might find that those business assets are taxed differently.
- You’re going to pay taxes on the profit from selling the business. That profit is calculated in a very specific way, and has a lot to do with the particular assets that your business has (see above). Just because you’ve invested $100,000 in the business this year and you’re selling for $150,000 doesn’t mean your actual profit will be $50,000.
- After you sell your business, your tax situation is going to change. Unless you’re starting another business, things will be different from here on out. You’re not going to be filing quarterly taxes anymore. You’re not going to be able to deduct all of those business miles on your vehicle, or the home office that you’ve been deducting. Make sure you’re familiar with exactly how your personal tax situation will change when you sell your business, and factor that into the entire process as well.
- It doesn’t hurt to get some quality advice. Your tax professional is just one of the people you’ll want to consult with through the process of selling your business. He or she can help you identify the tax implications of the sale, what your obligations are going to be, and how you will go about actually paying the taxes that you owe. In addition to attorneys and accountants, tax professionals should be key participants in these conversations.
- Make sure you pay attention to state and local tax implications, too. While federal taxes are going to require you to pay on the profit from selling your business, things may be different at the state or local level. While there are sure to be state taxes, you’ll want to check into the implications of what those might be in your particular state. Here again, your tax professional should be able to help identify these issues.
The prospect of selling your business can be daunting. Yet, for many small business owners, it’s also the key to their retirement, or to funding a new business venture. By making sure you know all of the tax implications of selling your business, you’ll avoid being surprised when it comes to file your taxes the next time around.