Congratulations! You’ve made a decision to pass your company’s legacy onto someone else – perhaps a child or a likeminded stranger – and ride off into the sunset of retirement… or onto your next business venture.
Of course, you will be taxed on the profit you make from the sale. So, as you prepare for this transition, there are a number of tax-related implications to consider as you strive to minimize your tax responsibilities. Without proper guidance from an experienced tax attorney, you could end up paying nearly half of your sales price in taxes.
There are different tax rates depending on whether proceeds of the sale are taxed as ordinary income or capital gains. When you are selling a business, the goal is to maximize the amount of sold assets that are categorized as capital gain. Buyers conversely, for their own tax planning purposes, prefer to allocate as much of the contract sales price to items that would categorized as ordinary income to the seller.
Like most business deals, there’s a subtle negotiating dance between the parties over the ratio of capital gains versus ordinary income that results in a settlement that neither party is happy about, but both can live with.
There are additional intricacies when considering whether the sale is an all-cash deal or requires payment installments; whether the sale is one of assets or one of stocks; or whether the sale can be treated as a tax-free corporation (in the case of a deal between two corporations).
Before you begin negotiations to sell your company, contact a law firm that specializes in tax law, including the timing and characterizations of transactions. I have been providing tax services to businesses and individuals for many years. Beforehand, I worked as a licensed certified public accountant and earned a master’s in taxation. Contact our office at 724-216-5180 or use our online form to see how we can help you.