Capital Gains Tax

Capital gains tax: The cost of selling your business

Capital gains tax: The cost of selling your business

Here’s how to make it work for you.

Imagine this. You’ve just sold your small business. You got a good price for it, and you’re confident the new owners will be good to customers and staff. The check cleared the bank, and you’re ready and excited for what comes next.

Then you get your tax bill.

The sale of your business is income, and there’s no way to stop Uncle Sam from taking his cut. But the way you structure the sale can affect just how much money you keep.

What is capital gains tax?

Capital gains tax is a tax on profits from selling an asset you’ve held for a year or more.

When you sell your business, you probably sell multiple assets you’ve held for more than a year – like your corporation, real estate, or equipment. Profits from those sales are capital gains.

The maximum tax rate on capital gains is 20 percent, though 15 percent is more common.

Profits that do not qualify as capital gains are treated as ordinary income, taxed at your individual income tax rate.

The maximum federal income tax rate is almost twice as high as the top capital gains tax rate, so you want to allocate as many assets as possible as capital gains.

Structuring your business sale

Consult with your accountant and business broker when working out the structure of your business sale. There may be times when reducing your asking price in exchange for asset allocation keeps more money in your pocket.

If your business is a sole proprietorship, partnership, or LLC, it will always be an asset sale. If it’s structured as a corporation, you might be able to sell it as stock.

When a corporation sells its assets, the profits are taxed twice – in the corporation’s tax return and in shareholders’ individual returns. A stock sale is only taxed once.

The buyer will also try to minimize their tax burden, so there will have to be some give and take. The advice of a professional will help you get the best deal.


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