Are you looking to sell your business? Maybe you’re considering retirement, in poor health, or just ready to cash in. Whatever your reason, you should be aware of the complexity of your venture, as well as the tax consequences that come along with it. The very first step should always be consulting with your WVC adviser. You can obtain an accurate business valuation and develop a tax planning strategy to minimize capital gains, and any other taxes from the sale, to maximize your profits.
Most business owners do not know how much their business is worth. This can result in severely under or overestimating a proper selling price. Obtaining a third party business valuation allows owners to sell at a price that is realistic for potential buyers, while maximizing the total value and profit at the same time.
As a business owner, you may think of your business as a single entity sold for one lump sum. However, it is actually a combination of assets to be sold that will be subject to different taxes under federal and state laws. The IRS requires each asset to be classified as capital assets, depreciable property used in the business, real property used in the business, goodwill or property held for sale to customers. The gain or loss on each asset is figured separately, classified as capital or ordinary, and taxed accordingly.
The sale of depreciable property can be tricky. Section 1231 gains and losses are the taxable gains and losses from the sale or exchange of real or depreciable property held for longer than one year. Whether you have a net gain or loss from all 1231 transactions determines if they will be treated as ordinary or capital. When section 1245 or 1250 property is sold at a gain, you may have to recognize all or part of the gain as ordinary income due to depreciation recapture rules. The remaining gain would be considered a 1231 gain.
The way a business is taxed when sold also depends on the business structure. “Pass-through” entities such as sole proprietorship, partnerships, and limited liability companies are required to sell each asset separately. This provides much more flexibility when structuring a sale to benefit both the buyer and seller with regard to tax consequences.
Corporations and s-corporations are subject to more complex regulations when selling assets and stock. For example, when a corporation is sold, the seller is taxed twice for all assets. The corporation pays any gains tax when the assets are sold, and the shareholders pay capital gains tax when the corporation is dissolved. On the other hand, s-corporations are only taxed once. Income or loss flows through to the shareholders who then report it on their individual tax returns.
Are you thinking of selling your business soon? Our team of business valuation and tax planning experts can help you make the most money with the least amount of consequence.
-Halie N. Baker, Staff Accountant