After years of hard work, you’re ready to use your assets to fund less labor-intensive goals. Or, maybe your small business is no longer suitable to your lifestyle. Selling your business allows you to turn your investment into income.
However, it’s essential to understand the tax consequences associated with selling a business. Here’s what you need to know.
Taxation of Your Business Sale Depends on Your Business’s Assets
When selling your business, you’re likely selling multiple assets that comprise the business.
You’ll pay taxes on the profit that you make for each asset. Your profit is calculated by subtracting your cost basis from the sale price.
How your profit for your assets is taxed depends on the type of asset and how long you’ve owned the asset.
Most business assets that you’ve held for more than a year are taxed as capital gains. The capital gains rate is lower than the ordinary income tax rate, allowing you to reduce your tax bill associated with the sale.
However, some assets don’t qualify for capital gain taxation. For example, profit from the sale of inventory is taxed as ordinary income.
It’s essential to have a qualified CPA monitor the sale of your business to help you minimize your taxes and ensure that you’re informed as to what kind of tax bill the sale will generate.
A Business Valuation Will Help You Understand What to Expect
If you’re serious about selling your business, it’s wise to have a business valuation completed.
A business valuation provides you with an estimate of how much you’ll receive for your business. It also includes an estimate of the taxes that you’ll owe for specific business assets.
You Can Defer Taxes By Allowing the Buyer to Make Payments
One way to reduce the initial taxes you pay when you sell your business is to permit the buyer to make installment payments.
You only have to pay taxes on money that you’ve received. Accepting payments lets you defer some of your tax liability until the buyer makes the payment.
An added benefit is that you can often command a higher sale price for your business by accepting payments. Buyers are willing to pay more for the convenience of paying for their purchase over time. You may also charge interest for the amount that you’re financing.
You can only accept installment payments on assets that qualify for capital gains treatment.
Need more info on the tax consequences of selling a business? Contact us today for a consultation!
