Tax Planning Methods to Bear in Mind When Selling a Business

According to Project Equity, 2.3 million baby boomers operate their own companies. According to this NGO, six out of ten company owners want to sell their companies over the next ten years. Keep in mind these tax issues whether you’re one of these people or a younger generation owner considering selling your company.

Everything for the sale of a single proprietorship should be negotiated
A transaction is handled as if you sold each asset individually if your company is a single proprietorship. The majority of the assets result in capital gains, which are taxed at low rates. However, the sale of certain assets, like inventories, results in regular revenue. It is up to the parties to negotiate the terms of the sale, including how much of the business’s assets will be purchased.

Selling a joint stake

A capital asset transaction, which generates a capital gain or loss, is the selling of a partnership stake. Unrealized receivables and inventory items will, nevertheless, be considered as ordinary gain or loss for the purposes of any gain or loss. An investment in an Opportunity Zone might delay capital gains.

Select a corporate asset or stock sale

You may choose between selling shares or classifying the transaction as an asset sale if you own a firm. Typically, sellers prefer to simply sell the shares in order to confine tax reporting to the transaction’s capital gain. However, purchasers prefer a sale of the asset since it raises the basis for the depreciable assets they are buying. Once again, the sale’s structure might be settled through talks between the parties. For instance, a seller could be prepared to accept somewhat less for the completion of a stock transaction in order to account for the increased tax liability that would have resulted from the sale of an asset.

Conduct a S election

Both C and S companies are subject to the classification of the transaction as a stock or asset sale. Being a S company, however, offers tax benefits. The owner is required to disclose an extra 3.8% Medicare tax on this net investment income when a gain on the sale of a C company occurs. In contrast, the gain is exempt from this tax if the company is a S corporation and the owner is actively engaged in it rather than just acting as a passive investor. If necessary, a C corporation that intends to sell its assets might decide to become a S corporation, provided the company satisfies the criteria for such designation.

Utilize a payment plan sale

Making the transaction an installment sale is one technique to reduce the tax burden on the proceeds of the sale of a firm. You automatically have an installment sale if at least one payment is received outside of the year of the sale. However, there are a few things to remember. For the sale of inventories or receivables, installment sale reporting is not applicable. Additionally, there is always a chance that a buyer may back out of an installment selling agreement. The instructions to Form 6252 include information on installment sales.

Selling to staff

If you have a C corporation and are proactive, you may use an employee stock ownership plan to sell your company to your employees (ESOP). Employees are the owners of the ESOP (find more information about ESOPs from the IRS). Owners don’t have to look around since they have captive customers. You decide on a fair selling price, and the ESOP pays you the money. The profits may then be rolled over into a diversified portfolio to postpone paying tax on the gain.

Selling companies may also employ ESOPs, however the owner deferral option is not available. It could make sense to revoke a S election prior to a sale.

Gain should be reinvested in an Opportunity Zone

If they take action within 180 days after the sale, business owners who achieve capital gains on the sale of their company may be able to postpone paying tax on those profits. They are able to reinvest their earnings in an Opportunity Zone (you do this by investing in a Qualified Opportunity Zone (QOZ) Fund). Gain must be realized on December 31, 2026, or sooner if the fund interest is sold before that date, thus deferral is restricted. If the investment is kept beyond this time, subsequent appreciation may result in tax-free profits. An owner who sells their company is not required to deposit all of the revenues into a QOZ, but the amount of tax deferral is limited as a result. The IRS has information about Opportunity Zones.