When planning to sell their business, business owners expect to receive a certain amount of money. To speed up the transaction, they look for reliable partners among top business brokers Houston TX and Website Closers can help them a lot.
However, not all sellers take into account that they will have to pay taxes on the income received. Let's take a closer look at the tax consequences of selling business assets so that if such an idea arises, the seller will not be left at a loss for himself.
How taxable is the sale of a business
Through the sale of a business with Website Closers level business brokers sellers have a dramatic and long-term capital gain. Therefore, they may be subject to federal taxes on this amount. To properly calculate capital gains tax on business sale let's look at a notional example.
A seller created a company 20 years ago and invested 100 thousand dollars. After 20 years, for various reasons, he decides to sell the business, but the amount of the transaction will be 10 million dollars. Accordingly, the long-term capital gain will be $9.9 million. The federal capital gains tax will apply to this amount. It will amount to 20%. As a result, the net gain on the sale will be reduced to approximately $8 million USD.
In addition, state income tax must be taken into account. It varies from region to region. For example, in California, it will be 13.3%. And counts this amount is not from 8, but from 9.9 million USD. As a result, the net income after payment will be about 6.5 million dollars. Although the final sale was at the level of 10 million. Is there an opportunity to save on taxes? Let's try to figure it out together.
Business structure
In trying to understand how to minimize tax liability when selling a company, sellers need to look at the organizational structure of their company. The most common such structures will be:
- LLC;
- Partnership;
- S-corporation;
- C-corporation.
All but the last option are considered pass-through business forms. Therefore, in them, the owners pay taxes on the company's profits after the sale. The taxes themselves will not be added to the company. In the case of a C-corporation, the taxes are more complicated and you have to lose a lot more when selling than in the first 3 options. Therefore, it is better to sell companies with a pass-through form of business.
Assets or shares
Selling a business can involve selling all assets as well as shares. There are asset sale vs stock sale tax differences for seller and it should be taken into account. Most often it is the assets that buyers are interested in. In this way, they will receive certain tax advantages. In LLC, Partnership, and S-corporation structures, sellers will not receive additional taxes, because the sale will be considered as one asset. It is more complicated with shares.
There will also be certain difficulties for those who sell a company with a C-corporation organizational structure. In this case, it is better to sell shares and then you can avoid additional taxation.
What buyers are interested in
In purchase price allocation tax impact for seller it is worth considering that the investor will be more interested in acquiring the assets of the company. In this way, they can save on tax benefits. For example, the assets will allow the purchase price to be calculated using the straight-line method of Goodwill amortization.
The seller should take this into account. If it's more favorable for the buyer they can get the added benefit of a higher sale. However, it is worth remembering that selling assets is not profitable in all organizational structures. If there are large contracts, it will be more profitable to sell the shares than to obtain consent for the sale of assets from the parties to the contract.
Other taxes
When planning tax planning strategies before selling business it is also worth considering the state of the owner. If at the stages of the transaction, there is a death of the seller, it is possible to get a new taxation. We are talking about inheritance taxes and then the new owner of the company will face problems with payment of income tax and capital gains tax.
This could result in a situation where the sale of the company is illiquid due to the high taxation. Therefore, it is worth preparing for such transactions with sellers who have no health complaints. Otherwise, you can't avoid big problems.
Who can help you make the right deal on the sale of your business
Business brokers can help to reduce taxes and increase the possible sale price of a company. On the website of Website Closers https://www.websiteclosers.com/locations/detroit-business-brokers/ you can find reliable partners who will quickly organize the transaction. At the same time, they will prepare the necessary documents and help reduce taxation. Entrust the sale of your business to professionals.
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