For many entrepreneurs, the day will come when they must sell their business to retire, pay off some debts, or simply because they’re ready to move on to the next venture. Selling your business can be one of the most challenging tasks in entrepreneurship, especially if you want to maximize profits and taxes at the same time. This article focuses on tax strategies that can help you make more money by selling your business.
Keep Documented Records
As with most things, being organized is key. Keeping good records and receipts from your day-to-day transactions is a necessity when it comes to selling your business. You’ll need to know what you’ve made in order to calculate the capital gains that apply when you sell your business. And these records will also help when it comes time to pay taxes. Keeping track of all of these things can make the process much easier when you do decide to sell, but if you don’t have them and try selling anyway, it may cause an audit or worse – charges against your person. So be proactive and document as you go.
Reduce Capital Gains Taxes
At the time of sale, the difference between the purchase price and what you are getting from your buyer is considered taxable income. So, if a business owner has been depreciating their assets over their life expectancy then they will have a significant portion of their investment that hasn’t been taxed yet. As such, selling the business may be worth considering so as to take advantage of those potentially tax-deferred gains. There are several ways to do this. The first is through an installment sale, where the capital gain is spread out over years. Another option would be to do a tax-free reorganization which involves transferring ownership of the company without incurring any taxes on either side.
Avoid Passive Losses
One of the key advantages of owning a business is that you can claim some losses as passive losses. However, when it comes time to sell your company, these passive losses will come back to haunt you and might put a halt on your plans to cash out. The IRS caps passive loss deductions at $25,000 per year. If you have more than this amount in passive losses, any additional amounts will be carried over until the following year or years. You should plan ahead for this so that any excess passive losses are covered before selling your company. Consult with an accountant about how to use other tax strategies in order to avoid this situation altogether. Passive losses might make it difficult to enjoy the full benefits of your hard work. By minimizing them, you can maximize the value of your company. One strategy to help you do this is by using bonus depreciation. With bonus depreciation, eligible property may be deducted up to 50% instead of just 20%. It also allows for 100% expensing for qualified property acquired and placed into service during the year – but only through 2022. Bonus depreciation allows businesses to get the most bang for their buck!
Selling your business for shares
In case you want to sell your business and obtain shares, there are some important tax-related details that you may want to consider. Probably the most important one is the possibility of CGT liability deferral. Besides that, by selling the business for shares you may be eligible for Inheritance Tax relief obtained from the Business Relief. However, it’s important to also mention the possible disadvantages of shares. One of the most important is the possibility of losing the Business Asset Disposal Relief. So, it’s definitely up to you to balance these options and think about what strategy fits your goals the best.
In the case of a sole proprietorship, negotiation is key
In case your company is a sole proprietorship and you are thinking of selling it, you should handle it as if you sold each asset individually. The majority of the assets generate capital gains, which are usually taxed at lower rates. However, when you are selling certain types of assets, like inventory, you can generate ordinary income. It is up to the involved parties to negotiate the selling conditions, which include distributing the purchase price to each of the business’s assets.
This allocation is actually the negotiation that is taking place. According to the Asset Acquisition Statement, there are seven asset classes to that you have to allocate the price. These classes include checking and cash accounts and going-concern value and goodwill (an intangible asset), among others.
Moreover, in the case of a sole proprietorship, you may also want to think of paying the Capital Gains Tax. This needs to be paid in case you, as a seller, are making a profit after the deal is done. There are some assets that you may have to pay this tax on like shares, lands and buildings, and plants and machinery. Keep in mind that the Capital Gains Tax might also be required if you are selling your business as a partnership.
What about interest in the case of a partnership?
In the case of a partnership, selling an interest is exactly like selling a capital asset. This means that you can either gain or lose. However, you can treat any part of this gain or loss as an ordinary one because it results from inventory items or unrealized receivables. This is the part when you can defer your capital gain thanks to an investment in an Opportunity Zone.
The trick here is to be quick on your feet and act within 180 days. This means that you should reinvest your gains in an Opportunity Zone. It’s important to note, however, that this deferral is limited because all of your gains must be recognized before or by December 31, 2026. If you hold on to your investment after this date, you will have tax-free gains on any future appreciation.