When you are selling a business, you will likely be subject to taxes such as federal capital gains taxes, state income taxes, and taxes on certain assets. In this article, we will discuss the various taxes you may be subject to, how they are applied, and how you can best prepare to ensure you receive the most money from your sale.

What Tax Do You Pay When You Sell a Business?

When you sell a business, a federal capital gains tax of 20% will apply, reducing the net proceeds from the sale to just over $8 million. State income tax is also a consideration, with the maximum tax rate on capital gains for most taxpayers being 15%. Proceeds treated as ordinary income are taxed at the taxpayer’s individual rate.

Most of the assets trigger capital gains, which are taxed at favorable tax rates. However, the sale of some assets, such as inventory, will produce ordinary income and be taxed at a higher rate.

If you are selling a Limited Liability Company or a Sole Proprietorship, you will only be taxed one time as a capital gain tax, because the individual assets are not taxed separately. This means that the total proceeds from the sale will be subject to the capital gains tax rate.

The capital gains tax is imposed on the seller of a business, not the buyer. How much the seller has to pay depends on whether the assets were held for one year or less or more than one year. The tax rate is different for each.

From a tax perspective, sellers may prefer a stock sale because the gain on the sale will likely be taxed as long-term capital gains at a top current federal rate of 15%. This is much lower than the rate on ordinary income, which can be as high as 37%.

When selling a business, it is important to consult a professional tax advisor to ensure you are taking full advantage of all available deductions and exemptions to minimize the amount of taxes you may owe.

Conclusion

The amount of taxes you will owe when selling a business depends on a variety of factors, including the type of business, the type of assets you are selling, and the length of time they were held. In order to ensure you receive the most money from the sale as possible, it is important to consult a professional tax advisor who can provide guidance on how to minimize the amount of taxes you owe.

If you have questions or need help with selling a business, Atlantabusinesses.com is a great resource. They can help answer all your questions and provide guidance throughout the process. Visit https://atlantabusinesses.com to learn more.

What is the best way to not have to pay taxes when I sell my business?

Negotiate carefully to ensure the purchase price is allocated in a way that benefits you, look into an installment sale, be aware of the timing of the sale, consider selling to employees, and investigate reinvesting in an Opportunity Zone.

What is the best way to minimize taxes when selling a business?

The freeze technique is a widely-used method for selling a business. In this approach, the company’s operations are stopped until the sale is finalized, which helps to ensure the company remains profitable and is sold quickly. Additionally, it allows the seller to avoid any taxes that could be incurred through the sale.

What becomes of the money when a business is sold?

Do I need to pay capital gains tax right away?

You will not be required to pay capital gains tax until you decide to dispose of your investment. The tax owed will be calculated based on the difference between how much you bought the asset for and how much it was sold for.