Selling a business could result in major tax consequences

Business owners have to consider numerous different issues when planning to sell a company. Securing an appropriate valuation is only the beginning of the process. Negotiating to secure the best price possible, agreeing to provide appropriate transition support and a host of other practical considerations can influence the timeline and cost of a business sale.

Owners sometimes overlook a key factor that they can integrate into their planning if they consider it ahead of time. Specifically, they may fail to consider the tax implications of selling a business. What does someone need to consider when planning for the possible tax liability of a business sale?

The value of their ownership interest

A transaction can occur between two people who know each other and might still lead to substantial tax liability. Whether someone sells their business to their current partner, a direct competitor or a family member, the value of their ownership interest can potentially lead to taxes.

The value of the business’s assets

Someone’s interest in the company and a company’s resources are two different things. A business generally owns a variety of different assets, and those assets all contribute to the overall worth of the company. Owners selling their interest need to classify each business asset and quantify the capital gain or loss for those assets during the sale. Business assets including real estate, machinery, vehicles and other tangible goods can be worth hundreds of thousands of dollars. The sale of those assets can have tax implications, especially if the value of the assets has increased.

What taxes apply?

Depending on the type of sale and the way someone holds a company, there are a variety of different taxes they may need to cover. Sometimes, the sale of a business can increase someone’s income and might push them into a higher income tax bracket. However, many times the main concern might be capital gains taxes. Paying taxes on the appreciation in company value since its acquisition can lead to a substantial tax bill.

Proper planning regarding how someone holds their company and the way that they transfer it can influence how much they ultimately pay in taxes after a business sale transaction. Reviewing the company’s resources and valuation with a skilled legal team can be a good starting point for the tax planning process before a business sale.

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