Ready to Sell Your Small Business? 3 Smart Ways to Reduce the Tax Burden

14 May 2020
 Categories: Finance & Money, Blog

When you sell a small business, you want to make sure you walk away with a profit, and that all the money doesn't go into paying taxes. There are many different strategies you can employ when selling a small business that will allow you to reduce the overall tax burden you will face.

Negotiate How the Assets Are Allocated

When you sell a business, you are not selling a whole, intact structure. Rather, you are selling various assets. When it comes to selling the various assets for your business, the assets can be as categorized as either capital gains or as ordinary income.

The negotiation part comes into play because it is generally better for you, as a seller, to categorize assets as capital gains. With capital gains, the tax rate is lower than ordinary income. However, for a buyer with capital assets, the tax deductions are spread out over some time as they are seen as depreciable assets.

For the buyer, it is generally better for assets to be considered as ordinary income, so consider working with the buyer to reach an agreement that will allow for the biggest tax benefit for all parties involved.

Split Up Payments Over Time

When you sell your business, you may want to think twice about asking for the full payment upfront. By getting the full payment up-front, you are more than likely going to be bumped up into a higher tax bracket, which will result in a larger tax burden for you.

By spreading out the payments over multiple tax years, your income will be lower, and you will fall into a lower tax bracket. This strategy can reduce the amount of taxes you will pay on the sale of your business so you can keep more money from the sale of your business.

Splitting up payments over time has its risks, though. You will have to offer the buyer financing, and you need to trust the buyer of your business to make payments over time. With a payment plan, you may want to have a system of collateral set-up in case the buyer doesn't make all the payments.

If you want to reduce the tax burden when you sell your business, you need to carefully consider how to categorize each asset you sell. You may also want to spread the payments out over multiple tax years, to further reduce the tax amount you have to pay. For more tips on selling businesses and how to avoid taxes, contact local financial services.