Selling a Business

Key Tax Considerations Before You Sell Your Business

Selling a business is a monumental financial decision with far-reaching tax implications requiring key tax considerations. Moreover, proper business sale tax planning and understanding the tax implications of selling a company are critical to maximizing your financial return. At DuPage Tax Solutions, we partner with McKarns & Associates, creators of the Well-Heeled Exit program, to help you craft a comprehensive exit plan. Their expertise, combined with our specialized tax advice for entrepreneurs, ensures you can navigate key tax considerations like capital gains on business sales effectively and optimize your proceeds.

Home » Selling a Business: Key Tax Considerations

November 27, 2024

Federal Taxes to Consider when Selling a Company

Capital Gains Tax

One of the most significant tax implications of selling a company that needs consideration is the capital gains on business sales. It is calculated based on the difference between the purchase price (or basis) and the selling price. Moreover, capital gains are classified as either short-term (held for one year or less, taxed at ordinary income rates) or long-term (held longer than one year, taxed at typically lower rates). Therefore, strategic planning is vital.

Ordinary Income Taxes

In addition to capital gains, you must also consider ordinary income taxes. The IRS treats the sale of business assets separately for sole proprietorships, partnerships, and LLCs. Ordinary income tax rates usually apply to sold inventory and depreciable property like equipment. However, a tailored business sale tax planning strategy can help reduce your liabilities.

Estimated tax payments considerations before selling a business

Selling a business often results in substantial tax liabilities. Because the IRS requires taxes to be paid as income is earned, quarterly estimated payments are necessary. To avoid penalties and interest, you should consult professionals, such as DuPage Tax Solutions, to determine your expected tax liability and create a payment plan.

Net Investment Income Tax (NIIT)

If you’re a high-income earner, the Net Investment Income Tax (NIIT) may apply. This 3.8% tax on certain investment income, including capital gains on business sales, is applicable to individuals exceeding specific income thresholds. Identifying whether you fall into this category can significantly impact your tax strategy.

State Taxes to Consider when Selling a Business

State Income Taxes

State-level tax implications of selling a company vary widely and require business consideration. Some states impose additional capital gains taxes, while others may not. Consulting with experts familiar with your state’s tax regulations ensures you remain compliant and avoid unexpected liabilities. Be sure to consult your state’s tax regulations through our expert tax advisory services to understand the full impact.

Sales Taxes

Although sales taxes generally do not apply to the sale of an entire business, they might apply to specific tangible assets. Checking your state’s sales tax rules for business assets is crucial to ensure compliance.

Deal Structure Matters for the sale

Installment Sales

An installment sale can offer tax advantages by spreading payments over several years. This approach allows you to pay taxes gradually, making it easier to manage liabilities. Discussing this option with professionals ensures you maximize your financial benefits.

Section 1202 Exclusion

If your business qualifies as a small business stock under Section 1202, you might benefit from excluding part of the capital gains from the sale. This exclusion is only applicable for C Corporations. Proper business sale tax planning can help you explore this potential benefit.

Asset Sale vs Stock Sale

The decision to structure the sale as an asset sale or stock sale greatly influences the taxes owed. C Corporations may face double taxation in asset sales, while S Corporations typically pass income through to shareholders. Understanding these distinctions and their tax implications of selling a company can prevent costly mistakes.

Importance of Organized Books

Accurate and organized financial records play a critical role in successfully selling your business. Transparent documentation, including income statements and balance sheets, boosts buyer confidence. Moreover, demonstrating maximized profits is essential, even as you focus on minimizing tax liabilities. Learn more how we can help you organize your books.

Effective Tax Planning and Considerations for a Successful Business Sale

Tax Planning and Considerations Before Selling a Business

Effective business sale tax planning starts years before the actual sale. For tax advice for entrepreneurs, addressing selling a business tax considerations early by organizing your financials, exploring deductions, and planning the timing of the sale ensures maximum profitability and favorable tax outcomes. Ideally, begin planning three to five years before your intended exit.

Our Partnership with McKarns & Associates

At DuPage Tax Solutions, we collaborate with McKarns & Associates, experts in business exit planning. Their Well-Heeled Exit program is designed to help entrepreneurs create comprehensive plans that maximize financial returns. By combining our tax expertise with their strategic approach, you can ensure a seamless and profitable business exit. Learn more about McKarns & Associates and their program here.

Ensuring a Successful Business Sale

Selling a business requires careful preparation and strategic planning. By addressing the tax implications of selling a company, seeking professional tax advice for entrepreneurs, and understanding capital gains on business sales, you can achieve a financially rewarding outcome. DuPage Tax Solutions is here to support you every step of the way. Learn more about our expertise here.

References

“Sale of a Business.” Internal Revenue Service, www.irs.gov/businesses/small-businesses-self-employed/sale-of-a-business

“Topic No. 409, Capital Gains and Losses.” Internal Revenue Service, www.irs.gov/taxtopics/tc409#:~:text=Examples%20of%20capital%20assets%20include,gain%20or%20a%20capital%20loss

Barbara Weltman. Published on April 13, 2017. “Qualified Small Business Stock: What Is It and How to Use It.” U.S. Small Business Administration, www.sba.gov/blog/qualified-small-business-stock-what-it-how-use-it

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