Planning for the tax implications when it comes to selling your business is critical. Ignoring tax considerations until negotiations are well underway or a deal is struck is a serious mistake. Taxes on the proceeds of your sale, especially the potential for double taxation, can leave you clutching at the straws.
Business owners who decide to close their businesses may have taxable income or deductible losses. Selling your business can entail selling several types of assets, including business equipment and supplies, pending client transactions, real property and investment assets. Business owners must legally dissolve or close their businesses according to their state’s laws and with the Internal Revenue Service. Closing a business requires careful tax planning to avoid unpaid federal business taxes.
Typically, a business owner’s tax liability depends on the amount of gain or income he realizes. While determining a business owner’s basis is a complex topic, the general idea is that the owner pays taxes on the difference between what he paid for his assets and what he earned after the sale of assets. However, he may be able to adjust his profit margin by increasing his original basis.
The IRS looks at the seller’s consideration as a method in determining your tax liability when selling your business. A seller’s financial consideration is the amount of profits he earned or the difference between the fair market value of his property and his sale value. If a business owner transfers his real or personal property held for more than 12 months, he must report it as capital income. However, if he sells his property at a loss, he can deduct his loss as a capital loss.
When a business owner sells his intangible personal property, including patents, trademarks or trade secrets, the IRS requires that he obtain a personal valuation or appraisal of the worth of his intellectual property rights. His worth may equal his loss of future rights to royalties and future commissions. If a partner within a business sells his partnership share, the IRS does not tax the partnership but taxes the individual partner who sells his partnership assets.
Before selling your business or begin negotiations with a potential buyer, make sure you have discussed the potential tax implications with a qualified tax advisor. You can position yourself to maximize the value of your business if you fully understand the best way to structure a deal in light of your business structure and financial situation.