Tax on the Sale of a Business & What to Know
Selling your eCommerce business is the dream for many. It’s a chance to transform your blood, sweat, and tears into a big, beautiful paycheck. Perhaps you’ll use it to purchase a home, retire, or even fund an entirely new business venture.
Whatever your plans for the future, you need to remember that Uncle Sam will want his cut.
Before you start counting your dollars, you’ll want to understand how to value a business and what tax liability a business sale may bring. Here’s how you can prepare for the capital gains tax on a business sale.
Selling a Business Tax Implications
Generally speaking, when you sell a business, you’re not selling a single object or idea. Rather, you’re selling a group of capital assets that make up the entire company. In addition to your brand, this may also include your inventory, machinery, property, and so on—all of which are factored into the total price.
This is where the matter of taxation becomes complicated.
Most business tax situations will not be straightforward, since they’re heavily contingent on your company, its specific asset allocation, and its business structure. Depending on the percentage allocation, different parts of the business may be taxed as ordinary income or capital gains.
The government classifies the profits gained from an investment as capital gains. As the IRS notes:
Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the business sale is a capital gain or a capital loss.
In addition, the (IRS) Internal Revenue Service makes a distinction between short-term and long-term capital gains:
- Short-term – These are taxes applied to profits after selling a business you have held for less than a year. These are typically paid at the same tax rate you’d pay on your normal income.
- Long-term – These are taxes applied to profits after selling a business you have held for more than a year. Depending on your business income, this tax rate may range from 0% to 15% to 20%.
Tax on Sale of Business Considerations and Strategies
Understanding your potential state and federal tax liability is an excellent step for selling any business. But as you plan to sell your business, there are steps you can take to reduce your state and federal tax liability. These include:
Negotiate Asset Allocation
When you and your potential buyer arrive at a purchase price, your business’ various assets will be split up into their individual costs and profits.
As you negotiate the sale of the business, the more that can be designated a capital asset, the better. This is because capital gains are typically taxed at a much lower rate than ordinary income.
However, several kinds of assets can’t be classified as a capital asset, including:
- Tangible personal property
Consider Your Business Entity
The advice above largely applies to sole proprietors, partnerships, and S Corporations.
A C Corporation, on the other hand, typically won’t be able to benefit from capital gains tax rates, even if they sell capital assets. Instead, they must pay federal and state income taxes on the sale.
C Corps may also have to pay additional taxes, known as a taxable dividend, if the proceeds are shared among the company’s members.
That said, part of the negotiation may also include the structuring of the business sale. For a stock transaction sale, the buyer purchases stock to gain an ownership stake. If this is the case, the stock could be classified as a capital asset even for C Corporation.
Perform an Installment Sale
If you want to minimize your tax hit on profits from the sale of your eCommerce business, you may be able to negotiate the sale structure as an installment sale.
With this model, the ownership is immediately transferred, but the buyer pays the seller over a longer period of time with interest.
That said, this could expose you to additional risks, such as the buyer defaulting or capital gains rates increasing.
Tips on Preparing Your Business for the Sale
Before you learn how to sell your business online or start negotiations, you need to ensure that all of your information is on hand and accurate. Aside from helping you understand your tax liability, these steps can also help you compile the potential information buyers may need to know.
Key steps include:
- Gathering information on all of your assets – You need to itemize all of your business assets and estimate the associated costs. You will also have to factor in various expenses, such as setup, training, and improvements.
- Taking inventory – Do you have products, materials, and parts for the goods you sell online? You’ll need to take inventory and list the value of each business asset.
- Valuing your business – An expert will need to appraise the market value of the company, including its assets. This step can help you set an optimal sales target.
Make Selling Your Business Simple with Forum Brands
Once you have prepared for potential taxes and finalized your business exit strategy, you’ll be ready to sell the company to an interested buyer.
That’s where we come in. At Forum Brands, we provide exit options to entrepreneurs. We seek to buy growing eCommerce businesses and turn them into world-class brands.
So, are you ready to sell your Amazon FBA?
If there’s a mutual interest, we guarantee a no-hassle, 30-day close. Reach out today!
IRS. Capital Gains and Losses. https://www.irs.gov/taxtopics/tc409
Bankrate. What is the long-term capital gains tax? https://www.bankrate.com/investing/long-term-capital-gains-tax/
SmartAsset. Tax Implications of Selling a Small Business. https://smartasset.com/financial-advisor/selling-a-small-business-tax-implications