Reducing the Tax Impact of Selling a Business

The economic ups and downs of the past few years have left many business owners wondering whether selling their company may be the best way forward. If you are thinking about selling your company, it is important to be proactive when it comes to managing the tax consequences. Without accurate planning, your tax liability may overwhelm the financial benefits you hope to gain from the sale.

In this article, the reputable CPAs at Ferguson Timar discuss both how business sales are taxed and how to minimize tax liability tied to the sale of a for-profit enterprise. The challenging news is that business sales can lead to significant tax burdens. The good news is that by embracing a proactive approach, you can mitigate the risk that your tax liability will be unduly burdensome.

How Business Sales Are Taxed

When selling a business, you’ll need to prepare to be taxed on the profits of the sale. Incorporating tax planning into the deal structure is vital for minimizing tax liability and allowing for strategies such as tax deferral to spread any liability over years.

Some business sale profits are taxed as income while others are taxed as capital gains. One of the reasons why it is so important to seek assistance with your business sale tax strategy is that you may not be able to accurately discern how your profits will be taxed without help. This area of law is notoriously complex.

When you sell your business for more than it is worth, you’ll incur both short-term and long-term capital gains tax liability. The sale of short-term gains—which are generally applied to assets held for less than a year—is taxed as ordinary income. Whereas the sale of long-term gains is taxed per capital gains tax rates relative to income.

When assessing your tax liability, the IRS will evaluate your burden as it relates to individual assets held by the business, not the sale price of the entire business. As a result, how individual assets are categorized in a sale context is very consequential.

The Importance of a Savvy Allocation Strategy

When negotiating a sale, you and the buyer will need to reach an understanding about how the nuances of the purchase price will be classified as it relates to both individual and intangible assets. Your allocation strategy will profoundly impact both your tax liability and the buyer’s as well.

Unfortunately, if the buyer’s liability is low, the deal is likely structured in ways that are disadvantageous for you. If the deal is structured favorably for you, it may unduly burden the buyer. As a result, you’ll need to prepare for prolonged negotiations concerning allocation and you’ll need to seek professional support to better ensure that your tax liability interests are protected throughout.

Lowering Capital Gains Tax Burdens

Due to the realities explained above, lowering your capital gains tax burden will largely depend on your ability to successfully classify assets in your favor without tipping your hand so far that you scare away the buyer. Thinking about this process as selling an asset collection (instead of selling a “business”) can make this process easier to think through.

By classifying assets in ways that allow the gain to be treated as a capital gain—not income—you’ll be taxed at lower rates. Assets classified as capital gains are also eligible to be taxed via the installment method, which will allow you to defer some of your liability until future payments on the sale are made in upcoming tax years.

Additionally, more technical strategies utilized to minimize tax liability resulting from a business sale can be discussed with a knowledgeable CPA at any time.

Ferguson Timar Can Strategically Minimize Your Tax Liability

Whether you’re committed to selling your business or weighing the pros and cons of doing so, know that the experienced and knowledgeable CPAs at Ferguson Timar can craft a tax strategy to strategically mitigate your personal and business-related liability now and into the future. Although tax liability is usually an inevitability, it can be minimized effectively with the assistance of a skilled CPA. Connect with our team today at (714) 204-0100 to learn more. We look forward to speaking with you.