Overview of the Tax Consequences of a Business Sale

Posted on June 29, 2012 · Posted in Blog

Selling a business has certain tax implication that must be considered before entering a deal. Since the proceeds from selling your business are income, you can be assured that the government is going to want its cut.

The information below is a general overview of the taxes consequences when buying or selling a business. For more a more detailed review, email us and we will send you a copy of our booklet “Understanding the Tax Consequences of a Business Sale.”

Determining Type of Income:

The profits from selling a business are classified as income, and there are two main ways that it can be taxed: Ordinary Income or Capital Gains.

The type of income that you claim depends on several factors and how you divest yourself of ownership. Determining the rate and classification of ordinary income vs. capital gains is constantly changing. However, in general, ordinary income is taxed significantly higher than capital gains.

This blog will focus on the main breakout of tax structure –Ordinary vs. Capital Gains Income and Asset and Stock sale. Future blog posts will go into the details of other areas.

Assets vs Stock Sales

If a corporation sells the stock to a buyer then all proceeds are taxed as capital gains which are currently and typically lower than ordinary income. In addition, all liabilities past, present and future go with the transfer of the stock. So a stock sale means lower taxes and the elimination or reduction of many associated risks of owning a business.

So it’s a simple decision… right? Wrong! The vast majority of all privately held company sales are structured as asset sales. The reason is that most buyers and their financers simply refuse to take on the risk and liability of a stock sale. Remember the Golden Rule — whoever has the Gold rules!

Double Taxation

Since the odds are your sale will be an asset sale, what can you do to minimize taxes? The first thing to avoid is double taxation. The government taxes C-corporations twice: the corporation is taxed when the assets are sold and the shareholders are also taxed again when the profit is distributed from the company. In this way, when you sell the assets for a C-corporation, you will be taxed twice. An S-corporation and LLC only pays taxes via its shareholders, thus avoiding double taxation.

Reducing the Amount of Ordinary Income

The sale of a company is broken out among tangible assets, intangible assets and goodwill. Tangible and intangible assets over book value are primarily subject to taxation at the ordinary income rate of the shareholders. Goodwill (relationships, reputation and indefinable value) is taxed at capital gains. Typically the more goodwill… the less taxes. Stay tuned as future blog posts will go into more details on these components.

Consulting a CPA or a tax professional is highly recommended. Preparation and consideration of all relevant aspects are key when selling your business.

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