When your business reaches the point of sale, there can be a point of pride in the work you have put in. You are being rewarded for that hard work through the value at the time of sale, but we can help you get even more value out of the sale of your business.
You have grown your business to the point where other businesses or individuals find enough appeal to make an offer. When that offer comes, it can be easy to see the dollar signs and move quickly – but a proper tax strategy can avoid a large capital gains tax on the growth of your business.
The tax burden that comes with this transaction will depend on a number of factors. Taking careful consideration of those factors and structuring the sale properly is where the money truly lies.
How the Government Applies Capital Gains Taxes to Business Sales
The Internal Revenue Service (IRS) and the state of California are going to want their cut of the transaction. Whether you are selling your business as one asset or selling off individual business assets, the tax will be applied by considering the value you paid on day one and the price you are selling it for today.
The rate at which that difference is taxed will depend on your current income. If you have owned the business for less than a year, the tax bracket you currently fall into would apply. If you have owned the business for more than a year, the capital gains tax will be between 0% and 20% depending on your income. The following rates would apply if you sell shares in a corporation, or membership interests in an LLC taxed as a corporation:
|
Filing Status |
0% Capital Gains Tax |
15% Capital Gains Tax |
20% Capital Gains Tax |
|
Single |
Up to $41,675 |
$41,676 to $459,750 |
$459,751+ |
|
Married, filing separately |
Up to $41,675 |
$41,676 to $258,600 |
$258,601+ |
|
Married, filing jointly |
Up to $83,350 |
$83,351 to $517,200 |
$517,201+ |
|
Head of Household |
Up to $55,800 |
$55,801 to $488,500 |
$488,501+ |
Note: These numbers are for the fiscal year 2023.
In California, capital gains are taxed as income – but the state does not distinguish between short and long-term gains as the federal government does.
Business Structure Matters
The structure of your business will impact the way the IRS calculates the capital gains tax. If your business does not deal in stock sales (such as sole proprietorships and LLCs), the IRS will consider the value of the individual assets held by your business instead of viewing the business as one asset.
This means the value of each asset will have a capital gains tax attached to it, even if you are selling a company under those structures as one entity. Other business types avoid this individual capital gain tax application.
How You Can Lessen the Capital Gains Tax Burden
The first and most obvious step is to avoid selling your business in the first year you own it in order to avoid triggering a short-term gains tax. Once you have crossed the one-year threshold, you have a number of options to lessen this tax burden.
If your business does not deal in stock sales, then structure the sale in such a way that applies a majority of the purchase price to assets that fall into the long-term gains as opposed to any that have been owned for less than a year. Additionally, if your business has assets that you have claimed depreciation on then keep the purchase price on those assets low (a recapture tax applies to any depreciation previously deducted, or allowed to be deducted).
The IRS looks favorably upon internal sales to employees or shareholders. If you own a C-Corp, you can minimize capital gains taxes by offering employees the opportunity to purchase a portion or all of the business. Putting this money into an employee stock ownership plan moves the proceeds of the sale into an investment plan which defers the capital gains tax.
Alternatives such as receiving payments through installments, allocating payments to an Opportunity Zone Investment, or using a Charitable Remainder Trust can help you avoid these high tax bills.
Each of these options requires the meticulous attention of an experienced business law firm. The Law Offices of Tyler Q. Dahl will leave no stone unturned in maximizing the value you actually get out of the sale of your business and can help you establish an effective tax strategy as soon as you contact us.
Dahl Law Group
