How To Reduce Taxes When You Sell Your Business
After years of pouring your blood, sweat, and tears into your business, you’re now ready to move on to the next adventure. While you’re working on the sale, you also need to be considering the tax implications you could be facing with the sale of your business. After all, you can't keep as much of your well-deserved profit as you can. Keep reading to learn how to reduce taxes when you sell your business.
Capital Gains Taxes
When you sell off an asset for more than its tax basis, you could be liable for capital gains taxes. The only portion of the sale that is taxed is the actual gain on the sale. There are short term capital gains and long term capital gains rates, but when discussing the sale of a business, you have more than likely held onto the business for more than 12 months.
The capital gains rate that you are held liable for depends on the income tax bracket that you will end up in the year of the sale of the business. Below are the long-term capital gains rates for the 2022 tax year:
Single Filer:
- 0% rate up to $41,675
- 15% rate for $41,676 to $459,750
- 20% rate for over $459,750
Married Filing Jointly:
- 0% rate up to $83,350
- 15% rate for $83,351 to $517,200
- 20% rate for over $517,200
Married Filing Separately:
- 0% rate up to $41,675
- 15% rate for $41,676 to $258,600
- 20% rate for over $258,600
Head of Household:
- 0% rate up to $55,800
- 15% rate for $55,801 to $488,500
- 20% rate for over $488,500
Upon the sale of your business, you will have to pay capital gains tax on the capital assets from your business. To the IRS, your business is not one all inclusive asset; it is made up of many different types of assets that are sold separately. However, this makes the tax portion tricky since not all assets are going to be held liable for capital gains tax.
Capital gains taxes can take a significant portion of your earnings on the sale, so it is important to begin tax planning early on in the sale of your business. There are several different ways you can reduce your capital gains tax liability.
- Allocation of Purchase Price
Unless your business is a corporation or you are selling your portion of a partnership, the IRS will assign a value to each asset the business owns. You will then have to allocate the purchase price among the business’s assets. This allocation determines the gain or loss on each individual asset, as well as the buyer’s basis for each asset. The IRS provides guidelines on allocating the purchase price based on seven asset classes.
How the purchase price is allocated has a great impact on your tax liability. If the purchase price includes assets that are taxed at a capital gains rate, you will pay less in taxes than if the purchase price includes assets that are taxed at the ordinary tax rate.
- Installment Sales
It’s likely that the gain on the sale of your business will push you into a higher tax bracket. By creating an installment sale, you could lower your capital gains tax liability. An installment sale is made up of payments over time to spread out your tax liability. However, for it to be an installment sale, you must receive at least one payment after the year the business was sold. It is important to note that not all assets qualify for the installment sale method, which is why it is important to consult with a tax expert if you are considering using this strategy.
To properly reduce your taxes on the sale of your business, you need a well-versed and knowledgeable financial advisor to assist with this process. Having a professional on your side will allow you to have comprehensive strategic decisions put in place to save you money and hassle. Our advisors at Total Clarity Wealth are here to help. Schedule a consultation with us today to get started.
Sources:
https://www.sba.gov/blog/7-tax-strategies-consider-when-selling-business
https://www.viabeacon.com/blog/how-to-avoid-capital-gains-tax-on-business-sale
https://www.fundera.com/blog/how-to-avoid-capital-gains-tax-on-business-sale
https://www.bankrate.com/investing/long-term-capital-gains-tax/
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. LPL Financial and Total Clarity Wealth Management do not offer tax advice or services.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Total Clarity Wealth Management, Inc., a registered investment advisor and separate entity from LPL Financial.
