Selling a business can bring a windfall of cash, and that windfall can result in some substantial tax liability if you don't have a tax strategy in place. Here's how to minimize taxes when selling a business.
Spread the Payment out Over Several Years
Instead of taking a one-time payment for your entire business at the time of the transaction, spread the payments out over a period of several years.
An attorney can help you create a sales agreement that provides you with yearly installment payments, which will keep your cash proceeds from any one year lower. Since tax rates increase with annual income and some tax credits are linked to annual income, keeping a lower annual income will help you remain in a lower tax bracket and get more tax credits.
Price the Business' Capital Assets High
Once you and a buyer agree on the total price for a business, there's some room for negotiation over how that price is divided between different parts of the business. In this stage of the negotiation, you should price the business capital assets, which include things like its buildings and equipment, as high as possible.
Capital assets that have been held for a year or longer are taxed at the current capital gains rate, which is lower than the income tax rate. Thus, you can shift some of the proceeds paid for your business out of an income tax category and into a capital gains tax category without changing how much is paid for the business.
Give Children an Annual Gift
If your business is being sold to children who will continue to run the operations, a portion of the business can be passed on to children without incurring any tax.
Every year, parents are allowed to gift their children thousands of dollars without incurring any tax liability on the gift. These gifts can be cash, or they can be investments in a business. There are yearly limits on how much can be gifted, and the amount usually isn't enough to transfer a full business, but each gift transaction will lower what's paid in taxes.
Set Up a Private Annuity
Instead of an installment agreement that pays over a few years, a private annuity that'll pay for the duration of your life can be set up. This allows you to spread out payments over an even longer period of time and reduce your tax burden by doing so.
To learn more about selling businesses, how to minimize taxes, and other financial issues, contact an accountant or financial professional in your area.Share