Understanding Tax Liabilities Associated With Selling a Business
Selling your business can be a profitable endeavor. But you might underestimate the costs of doing so if you don’t consider the role of taxes. A qualified tax professional can help you understand the tax burden you may bear following a sale. Sound financial advice can help you structure the sale in a way that minimizes a potentially catastrophic tax burden before the deal closes.
Every transaction is a unique occurrence, so no general tax advice can apply to all businesses. A few simple tips, however, can prepare you for a meeting with a tax professional and equip you with realistic information that can help you make intelligent decisions.
Before Meeting With a Tax Professional
The tax professional will want to know why you are selling—or sold—your business. If you are selling a business you inherited, this can have significant tax implications. Some other questions the tax expert may ask include:
• What is the entity type? This can affect not only tax liability, but who must pay the liability.
• How did the business report its income? A sole proprietorship reporting income and expenses on a Form 1040 Schedule C will be taxed differently from a corporation with shareholders.
The most important document is the most recent tax form filed for the business, though previous years’ tax documents may also come into play. You should also take copies of other financial documents. If you have already sold the business and are just now getting around to tax planning, take any and all closing documents.
What Are You Selling?
Business sales fall into two broad categories: stock and asset sales. A stock sale can get complicated, so if that’s the direction you plan to move, please don’t try to manage tax issues on your own. With an asset sale, it’s critical to know which specific assets you intend to sell. Consider not just tangible assets—furniture, fixtures, real estate, and machines—but also intangible assets. Those might include intellectual property, customers, clients, and your business’s goodwill and brand.
Some income may be taxed at more favorable capital gains tax rates. Other income may be taxed as ordinary income.
Other Tax Professionals
In addition to a CPA, you might need the assistance of a tax attorney. That’s particularly true if you have already sold the business, or if you intend to sell a business you did not run—such as selling a spouse’s business following an inheritance. Remember that a tax professional can give tax advice, but you’re ultimately liable for whether and how you pay your taxes. Likewise, a CPA cannot give legal advice. So if you’re already in trouble with the IRS, can’t afford to pay taxes, or have other complex legal issues, your CPA needs to work with your attorney.
For high-value large businesses, a tax attorney is a non-negotiable part of the closing team, along with an M&A advisor and a lawyer who specializes in mergers and acquisitions. Don’t expose yourself to unnecessary tax liability by neglecting these important team members.