The sale of your business will no doubt have implications on your tax burden. Sunbelt Business Advisors runs down several ways you can minimize your taxes and protect your hard-earned treasure.<\/p>\n
The IRS is going to want its cut of taxes when you sell your business. Taking a lump sum at closing can be both a blessing and a curse; you have a chance to grab your equity all at once, but the flip side is that the larger sum of money is going to result in a larger (more painful) tax bill. One alternative is to structure the deal as an installment sale and spread the capital gains tax burden over an extended period of time. A multi-year sale will help you limit your tax liability in the year you sell your business. Deferring payment over a series of years also helps you control your tax rate by avoiding a higher tax bracket.<\/p>\n
While this structure can help reduce the taxes you\u2019ll owe Uncle Sam, there are some risks to consider. You will want to evaluate the buyer\u2019s ability to make good on paying off the balance over time. Worried the buyer may default? Consider having the buyer offer some collateral or make other concessions that allow you to collect payment regardless.<\/p>\n
Buyers and sellers can work together on the allocation of the purchase price. Some assets exchanged in the sale will be treated as capital gains, and therefore taxed at a lower rate. Other assets will be classified as ordinary income and will be accompanied by a higher tax rate. Sellers will want to classify as many assets as possible as capital assets to take advantage of the lower tax rate.<\/p>\n
Keep in mind, you will need to work with the buyer to classify your allocations, and what\u2019s good for you as a seller may not be good for the buyer\u2019s tax burden. Both parties will need to agree on what portion of the purchase price applies to each tangible asset (like office furniture and inventory). You\u2019ll also need to agree to allocate part of the price to assets that depreciate over a longer period of time, including real estate and goodwill. The allocation of price can be an opportunity for you to negotiate with the buyer to find your sweet spot.<\/p>\n
This might be the best bit of advice when it comes to mitigating your tax burden. A qualified tax advisor is a critical part of your team as you plan and execute your exit strategy. A professional can help you make decisions early, including determining which tax structure works best for you, while keeping you compliant with IRS rules. As a seller, it\u2019s critical that you have a strong understanding of the tax implications associated with each decision you make. Working with a tax professional can help you get a grasp on each decision you have available to you well ahead of your closing date.<\/p>\n