Taxes are an important factor in the sale of any small business. Here's why: Proceeds owners receive from the sale are taxed as income, and quite often, large income payouts result in sizable tax bills. Fortunately, there are some strategies that can help you reduce your tax liability when selling your business.
In this article, you’ll learn some of the most common tactics, though they may not all suit your business. Be sure to discuss them with your CPA before proceeding.
Need help finding an accountant? You might consider one of these firms:
Reconciled
Your Business Deserves the Very Best
Reconciled is an award-winning organization and one of the fastest-growing accounting firms in the country. Their team of entrepreneurship gurus, e-commerce pros, and tech-loving cloud accounting specialists look at your business holistically and help you analyze your spending, measure costs, and find opportunities to enhance margin and profitability, along with taking on your day-to-day bookkeeping. Want to learn more? Click the connect button below for an introduction.
Xendoo
Be Tax Ready All Year Long
With Xendoo, you can access a dedicated team of expert CPAs and accountants who provide monthly bookkeeping, tax preparation and filing, and tax consulting, three services that will help you stay on top of all your financial needs. Their team can also help you with your personal tax returns, too. You can explore their plans with totally transparent pricing by following the link below, and for a limited time, you can try their online bookkeeping service free for one month. Restrictions may apply. See Xendoo's site for details.
1-800Accountant
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Business owners love 1-800Accountant. Here's why. First, the service pairs you with a CPA who is an expert in your state and industry and can answer the tough questions you have about your business. Second, while many others charge by the hour, or worse, by minute, 1-800Accountant sets you up with an affordable, flat-rate pricing plan so you always know what you'll be paying. Follow this link to try 1-800Accountant for 30 days with a money-back guarantee.
Tactic 1: Avoid a lump sum payment
When selling your business, one of the best ways to save on your tax bill is to avoid taking the payment for your business in full and, instead, set up a payment plan for your buyer. Typically offered through seller financing, many savvy business owners arrange loans for buyers to borrow a portion of the purchase price and repay it with interest over a defined period of time.
A benefit of this arrangement is that it allows you to spread the income you'd receive from the sale over a period of several years. This move, which can help you decrease your total yearly income, might place you in a lower tax bracket and reduce your overall tax obligation on the sale.
Another benefit is that you can collect interest on the financing you offer your buyer, which can help you come out even further ahead.
Want to learn more about seller financing? Check out this article:
Tactic 2: Focus on capital gains
You could also reduce your tax liability by ensuring that a portion of your business’s sales price is categorized as “capital gains.” Capital gains are profits that owners earn from the sale of a business asset that are taxed at a lower rate than other forms of income.
A valuation specialist or tax expert can help you determine whether each asset being sold can qualify as capital gains or if it needs to be defined as ordinary income. Those that qualify as capital gains must be further categorized as either a short-term or long-term capital gain. While it requires a great deal of work and negotiation with buyers (who often benefit more from ordinary income classifications than capital gains), this practice can result in significant tax savings for sellers.
Would you like to speak with a valuation specialist? Click the button below to connect with our network of specialists.
Tactic 3: Consider a stock sale
Another way you might reduce your tax liability when selling your business is by structuring your exit as a stock sale rather than a sale of assets.
When you opt for a stock sale, you may be able to report a portion of proceeds you earn from the sale as capital gains rather than ordinary income. How this might benefit your tax situation will depend on whether your business is structured as a C-corporation or an S-corporation. Speak with an accountant to determine whether a stock sale will result in a favorable tax outcome for your unique situation.
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Stock sales are another instance where the benefit may favor the seller over the buyer. You may need to work with the buyer to come to an agreement that benefits both parties. One option: selling your business for a lower price but structuring the deal so that the after-tax income is more favorable for you. |
Important note: Watch out for depreciation recapture
Depreciation recapture occurs when an asset is depreciated below its market value and sold for more than its book value. Depreciation recapture is taxed as ordinary income and cannot be spread across multiple years.
In asset sales, the difference between book value and lesser of the sale price or the original purchase price is taxed as ordinary income. But that's not the case when an asset is sold above its original cost. In this case, the difference between the purchase price and the sale price is taxed as capital gains. This may be more favorable for your tax situation. Your accountant will help you to work through this scenario if it’s relevant to you.
What’s next?
Thinking about how you'll manage the proceeds of your sale? A wealth advisor can help. This pro can help you to plan your retirement spending, taking into account your expected social security and investment income.
Interested in connecting with a wealth advisor? Check out these firms:
Robinhood
Commission-free investing
Robinhood's commission free trading is great for beginners with investment portfolios from $0-10,000.
With Robinhood, you can build your own portfolio using fractional shares of blue-chip companies or purchase a low-cost index fund such as the Vanguard Total Stock Market ETF (Ticker: VTI) or the Vanguard Total Bond Market ETF (Ticker: BND)
Pro tip: We recommend avoiding high-risk trading activities such as crypto currencies and options trading.
Betterment
Investing made better
Best option for investors with $0-500,000 in investable assets.
Betterment is a full-service advisory offering retirement planning and managed portfolio for a very low fee (0.25% per year).
Pro tip: We recommend sticking with Betterment's core strategies and avoid gimmicks like “innovation,” “social responsibility,” and crypto. Generally when investing, you want to avoid what's hot right now and stick to tried-and-true methods.
Owner Actions Connect
Connect with an expert team
Best for investors with over $500,000 of investable assets.
The Owner Actions team will connect you with up to three high-quality advisors who can build a custom plan to help you meet your goals.
As your wealth grows, your financial and estate planning start to become more complicated. Fortunately, with this tier of wealth, you can access high-quality advisors without having to pay high management fees.
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