The time is finally nigh to begin seeking a buyer for your successful California small business. After all those hours of sweat equity, you are ready to fully enjoy the fruits of your labor. One thing that concerns you, though, is having to pay all those taxes on your capital gains. To confront this issue, this blog will provide some general information on how to reduce your tax burden in this situation.
Why Do You Pay Capital Gains on the Sale of Your Business?
Death and taxes are the only certain things in life, and taxes are certain when you receive a windfall of cash. In the context of capital gains, you must pay taxes on the sale of assets when you make a profit from the sale. This gets complicated when you sell your business assets (not ownership) because instead of paying taxes on the overall sale and profit, you must pay taxes on individual assets owned by your company.
Purchase Price Allocation
When you sell your company’s assets, you are taxed on either the capital gains rate or the rate by which your ordinary income is taxed. The IRS has guidelines for how certain assets must be taxed. However, there is some wiggle room for buyers and sellers to negotiate when it comes to purchase price allocation. For instance, as the seller you might want to look at allocating a greater share of the purchase price to your business’s property because it is taxed at the lower capital gains rate, rather than non-competition clauses, which are taxed at the ordinary income tax rate. The key for you, as the seller, is to negotiate as much of the purchase price into assets that qualify for the long-term capital gains tax rate.
Installment Payments
Another method for minimizing the tax bill when selling your company is by requesting that the buyer pay you in monthly, annual, or other periodic increments. Generally, any payments received in later tax years are included in your capital gains tax calculation for that year. You can structure the payments so your capital gain amount for a specific tax year stays below certain capital gains tax rate brackets, subjecting you to less taxes. This is more appealing to the buyer, but there is greater risk for the seller if the buyer defaults on payments.
Conclusion
The information contained in this blog has, hopefully, given you a starting point from which you can think about ways to avoid a large tax bill when you sell your labor of love. However, when you start getting into the specifics of allocating the purchase price of your business’s assets and structuring installment sales, you really need a professional to help you take advantage of your tax-minimization opportunities.
Attorney Tyler Q. Dahl is not only an attorney experienced with helping people lawfully minimize their tax burdens, but he is also one of few than 100 attorneys nationwide who is a Certified Tax Coach. For advice on reducing your tax liability when selling a business or any other large asset, call the firm today at 916-545-2790.
Dahl Law Group
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