![]() ![]() It also matters what type of entity is buying the business, which assets are included and how the deal is structured. All this is governed by a complex set of IRS rules. This namely applies to whether it’s a sole proprietorship, partnership, LLC or corporation. The way taxes are handled during the sale of a business depend on the type of business entity being sold. For example, there can’t be any cash involved - it has to be strictly an exchange of stock. The IRS has specific rules about tax-free stock exchanges. Under the right circumstances, this can mean no taxes at all. ![]() If one corporation is buying another corporation, the deal can be done by exchanging stock. This is another area that can lead to more negotiations between the buyer and the seller. ![]() The buyer, however, often wants an asset sale because it presents more opportunities for depreciation deductions. In contrast, a stock sale gets taxed once, saving on taxes for the seller. This is important because if the corporation sells its assets, the proceeds will be taxed twice - once when the corporation pays taxes and again when its shareholders file individual returns. When a corporation is sold, however, the deal can be presented as a stock sale rather than a sale of assets. Sales of sole proprietorships, partnerships and LLCs have to be treated as sales of separate assets. Installment sales do add more risk, though, because the new owner must run the business well enough to produce profits to make payments. And the seller may also be able to charge interest, in addition to saving on taxes. If the seller agrees to take the price in installments, for instance, they can defer paying taxes until the payments are received.īuyers may end up paying more when they don’t have to pay everything upfront. In addition to asset allocation, the deal’s structure can affect the tax bill. A seller may offer concessions on price or terms of the deal to get a more favorable allocation. It’s this potential conflict between buyer and seller that makes allocation of assets an important part of negotiations. This, in turn, can reduce the new owner’s tax bill. For example, the buyer often wants as much of the price as possible allocated to costs that can be deducted or assets that depreciate. Within these boundaries, there is some flexibility. But selling capital assets held for more than a year creates a long-term capital gain. The IRS says, for instance, that selling inventory produces ordinary income. However, the asset allocation decision is not entirely up to the seller. ![]() Sellers will often want the sale of as many business assets as possible to be treated as capital gains to save on taxes. Currently the top individual federal income tax rate is 37%, more than twice as high as the long-term capital gains tax rate. Proceeds treated as ordinary income are taxed at the taxpayer’s individual rate. The maximum tax rate on capital gains for most taxpayers is 15%. If you sell an asset that you’ve held for more than 12 months, the proceeds will be treated as long-term capital gains. The difference between the two has major tax implications. Then there is the matter of how a sale of business assets will be taxed - as long-term capital gains or as ordinary income. Instead, with few exceptions, all the individual assets of the business are treated as if they were being sold separately. How Business Sales Are Taxedįirst, to the IRS the sale of a business usually is not considered to be the sale of a single asset. Different states have different rules and may collect more or less taxes than the IRS on the same deal. Keep in mind these issues are relevant for federal income taxes. Whether the sale can be treated as a tax-free merger in the case of a deal between two corporations.Whether the sale is one of assets or one of stocks.If the sale is an all-cash deal or requires payment installments.Whether proceeds of the sale are taxed as ordinary income or capital gains.There are four main tax-related issues to keep in mind when selling a business: Other decisions will be negotiated by the buyer, since their interests can ran counter to the seller’s. However, some of those choices are restricted by the Internal Revenue Service. The tax side of selling a small business has many moving parts, and as the seller, you’ll have a lot of decisions to make. ![]()
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