Selling a business can be a complicated process, and one of the big questions for business owners is how much taxes they will have to pay on the sale of the business. In this article, I will explain the federal and state taxes that apply to the sale of a business, as well as provide an example to help you understand how the taxes are calculated and how they can affect the proceeds.

How Much Are Taxes on the Sale of a Business?

A federal capital gains tax of 20% would apply, reducing the net proceeds from the sale to just over $8 million. State income tax is also a consideration. For proceeds treated as ordinary income, they are taxed at the taxpayer’s individual rate. Currently, the top individual federal income tax rate is 37%, more than twice as high as the capital gains rate.

Capital Gains Tax Rate

  • The capital gains tax rate starts at 15% but can go as high as 40% if you are in the highest tax bracket.
  • Business sales are taxed based on your capital gain, and the capital gains tax rate will be the same as whatever tax rate you pay on your ordinary income.
  • The maximum tax on long-term capital gains is 15% for qualifying taxpayers.

Tax on Assets

Most of the assets trigger capital gains, which are taxed at favorable tax rates. But the sale of some assets, such as inventory, produce ordinary income, which is taxed at a higher rate than capital gains.

Conclusion

As you can see, the taxes on the sale of a business can vary significantly, depending on the type of assets sold and the applicable tax rates. It is important to consult a tax advisor when considering the sale of a business to ensure you understand the applicable taxes and how they will affect the proceeds. For more information on selling a business, check out the resources available at Atlantabusinesses.com, a great resource for answers to all your questions about selling a business and about business brokers.

What is the taxation process when selling a business?

When you sell the business, you can work out your profit or loss by deducting the amount you originally paid for it from the sale price. If the sale amount is larger than the original price, you will have to pay capital gains tax on the difference. However, if the sale amount is less than the original price, you will not be liable to pay any capital gains tax.

What is the best way to avoid paying taxes when selling my business?

Negotiate carefully when selling your business to ensure you avoid capital gains tax. Consider using an installment sale to spread out the purchase price. Pay attention to the timing of the sale, as this may have an effect on your obligations. If possible, sell to employees as this can provide tax benefits. Look into Opportunity Zone reinvestment as another way to reduce or eliminate taxation.

What is the process for figuring out capital gains when selling a business?

Calculate your net proceeds by subtracting any commissions or fees from the sale price. Then, subtract your original cost (your basis) from the net proceeds to find out how much profit you made. If this amount is positive, then you have a capital gain.

What is the rate of capital gains tax on a sum of 200000?

For single taxpayers, the capital gain tax rate is 0% on income up to $44,625, 15% on income between $44,626 and $200,000, and 20% on income over $200,001. For married taxpayers filing jointly, the rate is 0% on income up to $89,250, 15% on income between $89,251 and $250,000, and 20% on income over $250,001.