FAQs
What are the tax implications of selling my business?
The tax implications of selling your business vary depending on several factors, including the structure of the sale, how much of the proceeds will be taxed at capital gains tax rates versus ordinary income tax rates, and whether your company has any tax exposures in other states.
How can I minimize capital gains tax on the sale of my company?
You can minimize capital gains tax through strategies like structuring the sale as an installment sale, utilizing capital gains exemptions, or considering a Qualified Opportunity Zone investment.
What is the difference between an asset sale and a stock sale and which is better to maximize my after-tax proceeds?
In general, a buyer wants to purchase assets and a seller wants to sell equity for the best tax results. But sometimes there’s a compromise that will lead to the best tax outcome for both buyer and seller. I help sellers navigate the alternatives, and often can demonstrate to the buyer why more proceeds means a better tax answer for both buyer and seller. Read more about the tax implications of an asset sale vs a stock sale here.
Are there tax incentives for selling to employees or family members?
Yes, there are potential tax advantages when selling to employees, such as Employee Stock Ownership Plans (ESOPs). A sale of your business to family members who may be in lower tax brackets can be a smart move. Family limited partnerships are a common technique to leverage to achieve tax-efficient transfers to family members.
Can I use a 1031 exchange when selling my business property?
A 1031 exchange can be used for real estate within your business, not for the sale of the entire business. This strategy allows you to defer taxes by reinvesting the real property sales proceeds into other real estate.
What is the Net Investment Income Tax (NIIT), and how does it affect me?
NIIT is an additional 3.8% federal tax that applies to investment income, including capital gains, when a taxpayer’s adjusted gross income exceeds certain thresholds. NIIT can often be avoided on the sale of a business in which the owner actively participates.
Are there any tax deductions available for selling a business?
Yes, there are deductions available, such as the costs associated with the sale, including legal and accounting fees. However, depending on the structure of the sale, some costs may have to be capitalized in accordance with a famous Supreme Court case, Indopco.
How does the Qualified Small Business Stock Exclusion work for tax savings?
If your business is in a US C corporation, you acquired the stock via original issuance from the corporation, and you’ve owned the stock for at least 5 years at the time of sale, it’s worth exploring whether it it’s Qualified Small Business Stock (QSBS). A significant portion of capital gain from the sale of QSBS is completely excludable for federal income tax purposes.
What is the optimal timing for selling my business from a tax perspective?
The optimal timing depends on your financial goals, market conditions, and tax laws. Due to the expiration of certain reduced income and estate tax rates at the end of 2025, it’s advisable to explore a sale sooner rather than later. We can help with pre-sale tax due diligence and can model out different tax scenarios to get the maximum after-tax proceeds for the sale of your business.
Can I transfer my business to a trust for tax advantages?
Transferring your business to a trust can offer estate tax benefits and non-tax benefits such as protection from creditors, but in general it doesn’t offer any immediate income tax or capital gains tax savings.
What is the impact of state taxes when selling a business?
State income taxes and state sales taxes can significantly impact your overall tax liability when selling a business. How much of a bite state income taxes will take depends on your state of residence and other factors.