Are you thinking of selling your small business? Whether you’re selling it to raise cash for something else, because you want to get out of the business world or because it’s the right time to sell due its overwhelming success, it pays to consider the tax ramifications. Handling tax issues correctly when selling your small business will save you money and keep you secure from any potential problems with the tax man.
Negotiate Sales of Assets Independently
If you run the kind of business that has assets, it’s best if you negotiate the sale of assets separately. There are seven classes of assets that the IRS identifies for tax purposes. Some asset sales count as capital gains tax, while others, like inventory, are taxed as ordinary income. The seven asset classes can be found in the instructions for Form 8594. Since determining the asset class can be complicated, it’s best to let your CPA this part of your filing. Just be sure to consult with your CPA ahead of time so you know what kind of taxes you might incur based on the type of asset sale. You may just find that it pays better to retain certain assets or to let others go that you had planned to keep.
Buy Out Partners First
If you have a business partner, selling the business as a partners will be much more complicated than if either one of you sells as a full owner. If you buy out your partner beforehand (or let them buy you out), you’ll extricate yourself from their tax filing. That way, if your ex-partner comes under scrutiny from the IRS for any reason, any time in the future, you won’t be pulled into the situation.
If you’ve already consulted with your CPA and it looks like you’re going to take a big hit by selling, consider reinvesting. There are ways to shift your interest by investing in one of the hundreds of Opportunity Zones scattered across the U.S. A Qualified Opportunity Zone (QOZ) is an area that has been identified by the government as economically distressed. Those who invest in these areas are entitled to preferential tax treatment. The way it might work is if you reinvest the gains from the sale of your small business within 180 days. It’s a tax deferral, not tax avoidance. You would need to recognize the gain by December, 31, 2026, or sooner if you sell the new asset prior to that date. Your CPA can provide you with details on this option.
If you’re in a position where you don’t need the profits but you do need the deductions, consider donations of some of your business assets. As long as you get receipts, you can take valuable deductions on donated items like:
• Company vehicles
• Large-format printers
• Office furniture
• Trade equipment
• Building materials
Non-profits, trade schools and community action centers can all use these kinds of donated items to further their mission. It might be better for you, tax-wise, to donate rather than pay taxes on the sale of these assets.
Be Prepared For Depreciation Recapture
Your CPA likely amortized certain purchases or calculated for depreciation on certain assets. But when you sell your small business, you’ll be liable for depreciation recapture, which will be taxed as ordinary income. The gain is taxed according to the table of depreciation that your CPA used, and is affected by how much you bought it for, how much depreciation you already claimed and how much you sold it for.
Consider an Installment Sale
If you find yourself in a tough position where you can’t afford the tax bill associated with the sale of your small business, consider an installment sale. An installment sale spreads out your profit from the sale over time, which also spreads out your tax liability. It gives your buyer more time to pay, gives you more time to organize your sale and allows you some breathing room as far as paying the tax man. Keep in mind that an installment sale can only be done if the sale results in a profit; not a loss. Also, payments for business assets are not eligible for installment sale treatment. Your CPA will help if you decide to do an installment sale.
Don’t Try To Do It Alone
The final tax advice when selling your small business is, don’t try to do it alone. Whatever you did when you bought the business or built it from the ground up, you need help now. Whether you bootstrapped the whole thing, or bought the business with cryptocurrency off of a website, that strategy won’t work now that you’re planning to sell. You absolutely need the help of a CPA to sell your business. You need to protect yourself financially, protect the transaction from fraud, and protect yourself and your family from issues with the IRS. Your CPA will be there to help you verify the authenticity of your buyer, review various methods that could help you reduce your tax liability and even help you decide what to do with the funds once they’re received from the buyer. If you have shares of stock involved, it’s even more important to involve your CPA in your decision to sell as early as you can. It’s possible that you may also need to enlist the services of a corporate attorney, but you’ll definitely need a CPA at a minimum.
Selling your small business can be the start of something new, the end of a long journey or the culmination of a dream. Don’t let taxes sully the experience for you. Work closely with your CPA to review all the tax implications of your sale so that you’re in the best position to move on to the next phase of your life.