7 Tax Strategies to Consider When Selling a Business
Walking away from their Business is very difficult for many business owners.
They don’t have any personal plans but love the action for their time in retirement. Negotiating a consulting agreement with the buyer may give you continuing tax breaks and ongoing income as a departing owner.
Decide on a Corporate Sale of Assets or Stock
If you are the owner of a Corporation, there is a choice in how to structure the sale.
1. Sell Stock
2. Characterize the Transaction as a Sale of Assets.
Buyers prefer the sale of an asset because this creates a higher basis for the depreciable assets they acquire. But sellers generally like to sell the stock to limit tax reporting to capital gain on the transaction. Again, if the parties negotiate, they can resolve the structure of the sale.
Consider Selling to Employees
You can consider selling your business entity to your employees as an employee stock ownership plan or a long-term installment sale. You can sell your business to all existing employees or a group of key employees. In this way, you can ensure that valued employees keep their jobs and continue job security going forward.
Structure as an Installment Sale
There are two main installments to structure a deal:
1. Earn-Out
The seller stays with the business for 2-3 years and earns a “consultant” salary.
2. Cash plus Seller Financing
The buyer signs a promissory note for an installment purchase and pays a small portion of the sales price.
Selling a Business: Partnership Interest
Selling a partnership interest is a capital asset transaction that may result in capital gain or loss. But the portion of any gain or loss from inventory items or unrealized receivables is an ordinary gain or loss. Through an Opportunity Zone investment, capital gain deferral is possible.
A Stock Sale or an Asset Sale?
In a Stock Sale transaction, the buyer purchases Stock to acquire an ownership stake in the business.
For example, a buyer may purchase Corporations and S corporations by using this stock sale method. An asset sale transaction involves capital assets.
Any tangible property, like a building and equipment, that has a value in the future of more than a year is a capital asset. You can separately make an asset sale for inventory from the business sales price.
Whether it’s the stock or asset sale, the guidelines for short and long-term capital gains rates apply to both.
Reinvest gain in an Opportunity Zone
Business owners who realize capital gains on the sale of their business and act within 180 days of the sale can defer tax on that gain. An Opportunity Zone is where they can reinvest their proceeds.
Type of Business Entity
Individuals’ percentage of interest in businesses such as corporations and partnerships is capital gain income when the individuals sell that interest.
The capital gains rates and tax implications vary depending on the type of entity.
1. Partnership
The capital gain is due to the individual’s partnership assets. An individual can sell his percentage of a partnership interest to a buyer.
2. C Corporation
When Shareholders sell the stock, they pay capital gains. And when the C corporation is sold, they may also pay a corporate tax.
3. S. Corporation
The transaction can be structured as stock or asset sales when an S corporation is sold. The corporate structure can remain intact, meaning that there will be no additional corporate tax implications.