Most business owners, when getting ready to sell, fear that they are going to be hit with a heavy tax burden if they sell. It couldn’t be further from the truth. In most cases, this fear could be costly, especially if someone decides not to sell because they are going to give too much to Uncle Sam.
Benjamin Franklin said it best “In this world nothing can be said to be certain except death and taxes.” The fact is, a business owner will pay taxes if he keeps the business or sells the business.
To “clear the fear” of paying more taxes upon selling—it simply isn’t true—you will pay less taxes.
When you run your business, you are taxed on the dollars you earn on an income basis. Depending on where you land in the current complicated tax code-you will pay from 25% up to 45% on your income. When you sell your business, you will pay up to 22%! You’ll pay on the Gain on Sale which is “any monies above and beyond the asset value of the asset sale.” To give you an example, if you sold a business for 1 million dollars and you have $500,000 in assets, you would pay up to 22% of the 500K that you earned above and beyond the 500K in asset value.
Example: If you sold your company for 500k and have 200K in assets, you will be taxed on 300K. This does, of course, depend on where your final income bracket falls.
Uncle Sam doesn’t allow write-offs for things such as brand, logo, data base, client list, partnerships, proprietary systems, software built, websites, etc., when you file your taxes each year. But when you SELL any of those, they are considered assets. The purchaser is buying those assets. So if you have, for example, 10 desks, 10 computers and some phones you depreciate and expense while you are in business, those are also items on your asset list. But the client list you’ve developed over the years, the website that drives traffic to your business and your database, brand, etc., are part of your assets.
When the seller and the buyer agree to the allocation of assets in the purchase price, it is agreed upon and noted in the sale and for tax purposes as well.
In addition, a lot of sales have a “seller carry” component. (The seller waits to get paid 10% of the purchase price for 36 months, for example.) In that case, the seller can keep his corporation open and paying some expenses until the seller is paid in full. That can be up to 4 years. The old entity—the LLC, S-Corp, or whatever–can continue to cover expenses for the corporation and that helps reduce the self employed individuals tax liability, even though the new owner owns most of the assets.
Just remember, when it comes to taxation on the sale, capital gain taxes are less than income taxes. For an accurate assessment of federal and state capital gains tax, please consultant with a tax advisor in your area. But first, you should discover what the real sale price should be for your company.