Understanding the Impact of Taxes on the Sale of a Business

Are you thinking of selling your business? Tax planning in advance is an important part of the process. When you sell your business you will very likely trigger a taxable event that results in capital gains taxes. Long-term capital gain tax rates are 15-20% of the total gain. Planning now can give you a chance to reduce this and keep more of your sales proceeds.

Asset Valuation: Whether it’s physical property, equipment, or intellectual property, getting accurate valuations well in advance puts you in a better negotiating position and allows you to better plan.

Installment Sale: Instead of getting hit with a large tax bill all at once, why not consider negotiating an installment sale where the payments are spread over multiple years. This helps you pay less tax each year and creates a more consistent stream of income.

Business Expenses: Before you sell, it’s vital to ensure you’ve deducted all eligible business expenses. This can help lower profits in the year o sale and reduce your tax burden. Consult with a tax professional to make sure to stay compliant with the tax laws.

Section 1202: Section 1202 is one of the most important tax strategies to explore when selling a business. One of the most compelling aspects of Section 1202 is its ability to potentially substantially reduce or even eliminate capital gains taxes. Provided you have owned your business for more than five years, this could be a consideration for you. In order to qualify for tax benefits under Section 1202, your business must be actively engaged in operations (your business assets are used for business purposes on a regular basis). Qualified Small Business Stock (QSBS) is another critical component of Section 1202. Most C corporations shares qualify, and this can offer some unique tax benefits. I suggest you explore and determine your eligibility well in advance. You will need to do your due diligence to understand the requirements and limitations. Consult with a tax professional to see if Section 1202 is right for you.

Financial Planning: It’s always wise to engage a CFP that can help you with cashflow modeling and projections. It’s important to model various scenarios under many different assumptions (especially the impact of taxes).