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Selling a Business and Paying As Little in Taxes As Possible

Selling a Business and Paying As Little in Taxes As Possible

May 16, 2024

Selling a business is the result of years of work, planning, and commitment. While arriving at this milestone deserves proper recognition, it’s important to be aware of and plan for the potential tax liabilities that accompany the transaction.

Chief among those is the capital gains tax, the sum that applies to the profits of your sale. Other tax obligations include depreciation recapture, sales tax, and local or state taxes. The following overview provides a better understanding of the taxes involved in selling a business and how to minimize your tax obligations.

Key Strategies for Minimizing Taxes From Selling a Business

Here are some core concepts for limiting your tax exposure while selling a business.

Timing the Sale

Capital gains taxes are levied on the profit one makes from selling a business or other asset. The threshold at which these taxes are triggered varies from state to state and involves consideration of a few factors.

One such factor is the timing of the sale. In the U.S., business assets held for a year or less incur short-term capital gains taxes, while assets held for a year or more trigger long-term taxes.

Short-term capital gains correspond to the seller’s income tax bracket. Therefore, the tax rate usually ranges from 10% to 37% of profits, depending on your overall income and business status. The tax rate for long-term holdings—more than a year—is usually lower.

Economic conditions can affect the taxation of a business sale, as they dictate interest and inflation rates. Sellers might want to wait until economic turbulence ebbs to take advantage of tax breaks. Policies and regulations change from year to year, so it’s wise to keep an eye on recent legislation.

Structuring the Sale

The tax implications of selling a business hinge on the structure of the business in question. Companies structured as S corporations, limited liability companies (LLCs), and partnerships are pass-through entities that direct tax liability to the owners and shareholders when they file their tax returns.

Another consideration is whether the transaction is a sale of assets or stock. In an asset sale, the buyer gets defined assets and liabilities from the sale but doesn’t assume liabilities that aren’t specified. In a stock sale, the buyer acquires an ownership stake and inherits all the assets, liabilities, and legal responsibilities of the business.

Sellers usually face taxable gains in an asset sale. In a stock sale, the seller qualifies for capital gains treatment.

Utilizing Tax-Advantaged Options

When selling a business, the owner may look into some options that may be more favorable in regard to taxes.

A Qualified Small Business Stock (QSBS) designation can limit or exclude capital gains taxes as a result of the sale. Businesses located in a certified Opportunity Zone or distressed community may have tax benefits, including the elimination of capital gains tax assessment.

A seller may also agree to a payment plan in which the buyer pays in regular installments rather than all at once. This allows the seller to stagger their tax liability over time.

Maximizing Deductions and Credits

Sellers may take advantage of several deductions and tax credits that relate to their sale, like depreciation recapture, transaction costs, and carryover of net operating loss. Consult with a financial or tax advisor to identify potential opportunities for tax deductions and credits.

Estate Planning Considerations

The sale of your business can affect the future of your inheritors after you pass away. It’s a good idea to look into trust structures which can reduce their liability, like irrevocable life insurance, grantor-retained annuities, and charitable remainder trusts.

Find Out More About Selling a Business

Selling your business is a major milestone, and it’s wise to enlist the help of a financial professional to guide you through the process. At Paragon Wealth Management, we provide experienced advice to help you make informed decisions to help you work toward your short- and long-term goals.

If you’re in a position to sell your business, let’s connect to discuss limiting your tax exposure. To schedule a meeting, call (215) 543-6576 or email phil@paragon-wealth.com.

About Philip

Philip Rosenau is a Financial Advisor and Founding Partner at Paragon Wealth Management, a financial services firm based in Doylestown, Pennsylvania, dedicated to professionally supporting, educating, and providing informed direction to each and every client. As a longtime resident of Bucks County and the son of a local entrepreneur, Phil understands the unique needs of small business owners. His clients rely on him to build a manageable road map toward their goals, and he takes pride in providing them with the knowledge to understand their unique financial situation and helping them navigate their financial future with confidence. 

Phil obtained a bachelor’s degree in economics with a minor in business management from Drew University, and his passion for creating and maintaining business relationships drove him to join the team at Paragon Wealth Management. Outside of the office, Phil enjoys spending time with his wife, Caroline, and two children. He is a member of the MDM networking group, active with the local CrossFit community, and is also proud to be part of the Drew University Lacrosse Legacy, where he played all four years. To learn more about Phil, connect with him on LinkedIn.