Can You Avoid Capital Gains Tax on a Business Sale?
The long-term capital gains tax rates vary between 0%, 15%, and 20% based on the taxpayer’s income. However, you might be wondering if you can avoid capital gains tax when selling your business.
Have you thought about the impact of taxes on your business sale profits? You want to make sure that all of your hard work pays off. With tax planning, you can maximize profits. We understand the ins and outs of business sales, and we’re here to help explain how to avoid capital gains tax when selling a business.
Nobody likes paying more taxes than absolutely necessary. Taking time to research and use strategies and keep more money in your pocket at the end of the day. With our expertise, we can help you identify ways to minimize or even eliminate any additional costs associated with selling a business.
If you want to make the maximum amount of money when you sell your business, you can attempt to minimize capital gains tax. Learn more here and see what strategies you can take to increase business sale profit.
What Is a Capital Gains Tax?
Capital gains taxes apply to profits earned from the sale of assets such as stocks, real estate, and businesses. It also takes into account other investments in non-tax-advantaged accounts.
When selling an asset after acquiring it, the U.S. government considers any gain on the sale as taxable income. The capital gains tax is calculated by subtracting the original cost of the asset from its total sale price. Taxes are only due when you sell the asset, not while it is held.
How Is the Sale of a Business Taxed?
Capital gains tax is a type of tax that is levied when you sell an asset for more than its basis, or what you paid for it. The IRS assesses two types of capital gains tax: short-term and long-term.
Short-term capital gains are taxed at the same rate as ordinary income, which depends on your business’s tax bracket. Long-term capital gains receive more favorable treatment. Currently, the long-term capital gains tax rates are 0%, 15%, and 20%, depending on income.
When applying capital gains tax on selling a business, the IRS typically looks at each individual asset that the business owns. It does this rather than seeing the sale merely as one single entity or asset. This applies if the business is structured as a sole proprietorship, partnership, or limited liability company (LLC).
How to Avoid Capital Gains Tax on the Sale of Business
It is not always possible to completely avoid capital gains taxes on a business sale. However, strategic planning can help reduce the amount of capital gains tax that is owed.
Consult a financial advisor or a tax professional to determine if any tax reduction tactics may be beneficial in your situation. Some options include discounting stock, exchanging assets for other assets, and making donations to qualified non-profit organizations.
During negotiations for the sale of a business, allocating more of the purchase price to capital assets rather than depreciable assets can be beneficial.
Taking time to negotiate will help you get the most favorable allocation according to IRS rules. When done correctly, this can result in significant savings on capital gains tax.
Consider an Installment Sale
An installment sale is an option for selling a business that can help to spread out the capital gains tax liability.
By receiving payment in multiple installments rather than all at once, taxes can be paid over a longer period.
Watch the Timing
Selling a newer business? Timing is critical when it comes to capital gains tax. To take advantage of the more favorable long-term capital gains rate, You should hold onto the business and its assets for at least one year before selling.
Sell to Employees
If you own a C-corporation, one way to minimize capital gains tax is by selling the business to your employees through an employee stock ownership plan (ESOP).
Doing so avoids the need to look for outside buyers and allows cash from the sale to be rolled into an investment plan, thus deferring capital gains tax.
Explore Opportunity Zone Reinvestment
Business owners can defer capital gains tax through December 31, 2026, by reinvesting capital gains from a business sale into an Opportunity Zone.
To qualify, capital gains must be invested within 180 days of the sale. While this doesn’t eliminate the tax obligation entirely, it does allow for the payment to be deferred.
Tax Planning Tips
There are several things to do in advance of your business sale to lessen the amount of capital gains tax you will need to pay. Get yourself off to a great footing by following these tips.
Talk to a Financial Advisor
To understand the potential financial implications of selling a business, it’s important to consult a qualified financial advisor. Research tax advisors in your area, and interview them to determine which one is right for you. Find an advisor who will provide detailed advice about how to avoid paying so much capital gains tax.
Keep Detailed Accounts and Use a Tax Calculator
Use a tax return calculator to get an instant estimate of how your income, withholdings, deductions, and credits influence your tax refund or balance due amount. Understanding exactly what your accounts look like will help you and your accountant make the best decisions on the sale of your business.
Find Out if There Are Taxes to Be Aware Of
In addition to planning for federal taxes on the sale of a business, it’s important to assess what you might owe in state taxes. If you do business in a state without an income tax, you have an advantage.
But if not, it’s necessary to consider how you can minimize the amount of tax owed on the sale. Talking with a tax professional who is well-versed in your state’s tax laws can give valuable advice and assistance.
Looking for Tax Advice?
Selling a business can be an intimidating process, but with proper tax planning and advice from experienced professionals, you can make sure that the sale of your company is as profitable as possible.
Although you probably won’t be able to avoid capital gains tax entirely, by enlisting an accountant you’ll be able to maximize profits while minimizing associated taxes. Speak to an advisor at Fusion today to discuss the sale of your business.