Selling your Virginia, Maryland or Washington D.C. based business is more than likely the biggest transaction of your life. It’s your one opportunity to realize the value of all the time, blood, sweat and tears that you have put into getting your company to where it is today. Sure, maximizing the sale price is job one and hiring an experienced business broker like us increases your odds of getting the value you expect. However, that is just part of the equation.
Managing the tax burden associated with the sale is critical. You don’t want to give the government a larger portion of the proceeds than you have to – especially when smaller businesses tend to feel the most taxation pain. Consulting with a tax professional is the most effective way to ease this burden. In addition, here are a couple of tax mitigation scenarios to consider:
- Capital gains – Business owners are taxed on the capital gain achieved following the sale of their business. Capital gains tax is applicable when an asset is sold for a higher price than it was initially purchased for (the basis). The length the owner holds the asset also affects the capital gains tax. Businesses held less than a year are subject to short-term capital gains tax, which is higher than that for entities held for longer than a year. Working with an accounting professional to accurately calculate your basis in the business is essential to keeping your tax rate where it should be.
- Depreciation Recapture – Another aspect to watch out for is depreciation recapture. Depreciation recapture refers to a gain received from selling a depreciable asset that has to then be reported as income. According to internet financial resource Investopedia, “depreciation recapture is assessed when the tax basis of an asset exceeds the sale price. The difference between these figures is thus ‘recaptured’ by being reported as income.” Again, this is an issue that needs consulting from a tax professional.
- Asset Sale vs. Stock Sale – Depending on what type of entity your business is, structuring the sale as an asset sale or stock sale can have significant tax implications. S-Corporations and LLCs are pass-through entities while C-Corporations are taxed at the corporate level and at the shareholder level. Work closely with a tax professional to understand what type of transaction is best for you. In an asset sale, the seller is still responsible for the legal entity and the buyer purchases the individual assets of the company – fixtures, goodwill, equipment, etc. In a stock sale, the buyer purchases the seller’s stock directly which conveys ownership in the seller’s legal entity.
There are plenty of other issues that can impact the tax burden of a seller in a business sale. Make sure you have the right team in place to guide you through the process. Simply looking at the top line sale price can end up costing you big – as business brokers helping Virginia, Maryland or Washington D.C. business owners sell, we have a vested interest in ensuring you are prepared prior to taking the first steps in the business sale process.