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Selling A Business? Don’t Overlook
These Important Tax Considerations!




Whether you have a $20,000-a-year home business or a $2 million corporation, you must remember that there are only two certainties in life: death and taxes. When you are selling your business, taxes will undoubtedly factor into the equation. Here are a few considerations tax attorneys suggest you consider before preparing to sell.

 

Is It Capital Gains or Personal Income?

The federal tax rate on your sale can range from 15 percent (for long-term capital gains) to 35 percent (for standard personal income tax rates). How the government views the sale depends upon the structure of your company and the nature of what’s being sold.

 

Your Entity Type Will Affect Your Profits. 

Sole proprietorships, Partnerships, Limited Liability Companies and S Corporations are considered “pass-through” entities, which are taxed as capital gains (and naturally more favorable for you). On the other hand, C Corps have the benefit of being able to liquidate both stocks and assets… but the asset portion is taxed twice – as both personal income and capital gains. There are laws to dissuade you from converting from one entity to another just before a sale, so you will definitely want to consult a certified tax attorney to make sure you comply with federal regulations.  

 

There Are Several Other Ways To Get A Tax Advantage.

Sellers can negotiate more favorable tax terms if they’re working with a knowledgeable professional who can guide them. For instance, accepting payments will allow a seller to defer the tax (at the capital gains rate) until the last payment has been made.

 

It May Be Possible To Get A “Tax-Free” Deal.

Tax-deferred sales are possible if you exchange S Corp or C Corp stock for the corporate stock of a buyer. You will need at least 40 – 50 percent buyer stock for the transaction to be valid and this exchange is not possible for sole proprietorships, partnerships or LLCs. Sometimes sales gains can also be rolled over into an employee stock ownership plan.

 

Plan To Pay State and Local Taxes.

In addition to paying federal income tax, sellers of assets or stocks need to pay state and local taxes as well. Even if your company conducts business in another state, you will be taxed in the state of your residence. Ideally, you’d have a residence in a state without income tax to avoid having to pay. Stock transactions are not subject to sales tax, use tax or transfer tax. Asset transactions, on the other hand, may be subject to state and local tax. The transfer of property is typically taxed, as well as all the equipment.

 

The Bottom Line:

If you had a small business worth $3 million, making the right legal moves during tax time could mean the difference between paying $450,000 in taxes or 1,050,000. Which would you rather pay? The amount of money you spend on a tax attorney will be small fries compared to what you could owe Uncle Sam if you don’t understand all the laws and loopholes, so find a qualified professional you can trust long before you’ve initiated the sales process.

 

 

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Resources:
Forbes: Selling A Business? Taxes Are Key
Small Business Tax Advisor: Top 10 Tax Considerations When Selling Your Business

 


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