The time has come to sell your small business. You may have made the decision for any number of reasons, retirement, a desire to get out of your current business and change to a new profession, etc.
You are rightly concerned with the amount you will realize on the sale, taxes and might even think that the total cash amount of the sale is the bottom line on which you need to focus.
But what you really need to focus on is the after-tax bottom line. That’s right, proven tax minimization techniques can have a significant impact on your ultimate takeaway from the sale. That’s why you need expert tax and accounting advice regarding the sale. Let us show you how to keep more of the sales price you negotiated.
A final note before we get into it. The following analysis applies to most small businesses characterized as sole proprietorship, partnership or LLCs (limited liability corporations). If you are selling a larger corporation via a stock sale, other rules apply. We can help you there as well.
What are my assets?
Basically, your business usually consists of three kinds of assets: real property (the land your business sits on, assuming you own it); tangible assets or capital assets (just fancy terms for non-real estate property used in the business such as anything from a computer to a tractor to a die stamping machine); and intangible property (goodwill, patents, trademarks, a trade name, accounts receivable and the like). Each is treated differently for tax purposes. Because those assets subject to Capital Gains treatment – those assets you have depreciating over the years – provide the greatest tax savings. This post will focus on them.
Tax Savings Through Skillful use of the Capital Gains Rules
Because your biggest tax savings can be realized through the careful use of the Capital Gains rules, we will focus on them first. As we have said, the good news is that we can save you quite a bit of after-tax cash because of our knowledge of these rules. The bad news is that the Internal Revenue Service (IRS) have made the rules really complicated.
First of all, your assets are generally treated separately, so we need to make the gain calculation for each asset (or at least asset class, sometimes groups of the tax basis of same or similar things can be treated together). For each asset we need to determine the taxable profit you realized on the sale. In a simple system, if you bought an asset for $100 (called the tax basis) and sold it for $120, you made $20 and that sum would be subject to tax. But the Capital Gains system is not that quite simple, your actual tax basis – that is the key term here – is your original cost minus any depreciation you took on it, adjusted for any other items such as any casualty losses or the cost of sale.
Using our original example, if you bought the asset for $100, claimed $30 in depreciation over the years, thus resulting in a tax basis of $70, and sold it for $120 your taxable income from the sale would be $50. Note that the taxable gain in the second example is higher than that in the first example, but you will have realized tax benefits from the depreciation in the years in which you took them. Now for the good news. Assuming you held the capital asset for a year or more, you will typically pay 15% Federal Income Tax on the gain. Compare that to ordinary income tax rates
that can run as high as 37%.
As you can see, careful tax and accounting planning can make a big difference in the amount of after-tax cash you realize from the sale of your business. Do you have unique issues or concerns not discussed in this blog then please contact us by email or phone. We are here to help.