By Bruce Hakutizwi
Selling a business is an involved process. There are many moving parts, and as the business owner you have many hurdles to contend with before you even begin the selling process. Whether you decide to sell, close, or bequeath your business to another person, rest assured there will be plenty of legal considerations to take care of.
One of the things that needs constant attention and upkeep is taxes. It’s important to ensure that your “books” are updated and accurate. The question of taxes is always a big one, and there are many different factors that will influence your payment outcome. Since a business is a capital asset, selling it at a profit will result in the payment of capital gains taxes.
What are capital gains?
Before we dive into the specifics of capital gains as it applies to selling a business, let’s talk about capital gains in general. Capital gains and losses are exactly what they sound like: gains or losses from the sale of a capital asset. A capital asset is a valuable piece of property that one can own, such as a home, a business, a car, art, or investments. When these items are sold either at a gain or a loss, the resulting profit or loss is known as capital gains or capital losses, respectively.
If you’re about to sell your business, good news! The tax rate for capital gains has recently been lowered, leaving you with more of the profit from the sale of your business. However, there is still a lot to consider when it comes to the taxes you will pay when you sell your business for a profit.
Selling your business and capital gains
It may come as no surprise that capital gains taxes are very complicated. To start with, the capital gains tax rate may be higher or lower depending on how long you have held your business. If it has been less than a year, the sale will be taxed as regular income. If it has been longer than a year, it will be taxed differently.
Taxes may also work differently if you sell off individual pieces of your business, as opposed to selling it as a package. In this case, capital assets are defined as valuable items used to run the business, including things like computers, fixtures, furniture, and company-owned vehicles. You will be taxed on the sale of each of these items if they are sold piecemeal.
With this in mind, it may seem more logical to sell your business as a package. However, the IRS will view this sale as individual items contained within the sale, rather than the sale of one large item. So it may not be to your benefit to sell your business as a package, but rather in several pieces.
Things can become even more complicated when selling a corporation or partnership. Yes, these are also viewed as capital assets in the eyes of the IRS. Since a corporation is owned by shareholders, each share is valued when the corporation is sold. Each individual shareholder may be affected by this sale in terms of tax liability.
So, depending on how you want to sell your business, how long you have owned it, the assets that are currently held by the business, and how you structured the business when you first began, there are many different tax factors to take into account. Your best bet when selling your business is to hire a thorough and attentive accountant who can help you sift through all the different tax law, determine the best way to sell your business, and help diminish your tax liability. This, in turn, will help you maximize your profit (or minimize your losses) from the sale of your business.
Bruce Hakutizwi is the U.S. and International Manager of BusinessesForSale.com, a global online marketplace for buying and selling businesses. With more than 60,000 business listings, it attracts 1.4 million buyers every month. Bruce manages business development, account management, content building, client acquisition and retention in United States of America, Canada, South Africa, and Europe. He frequently writes about entrepreneurship and small business ownership. Connect @BizForSaleUS.