Proven Tax Implications of Selling Your Business

Proven Tax Implications of Selling Your Business - Sunbelt Business Brokers

Whether you’re planning to retire or getting ready to move on to a new business venture, selling your business is an exciting prospect. And while it’s possible to make a significant profit, selling a business also comes with serious tax implications. Here’s a look at some of those implications and how to minimize them.

Capital Gains Tax

Your business is likely an appreciating asset, so when you sell it, you’ll owe capital gains tax. Assuming you have owned the business for at least one year, the capital gain when you sell is classified as long-term.

Long-term capital gains tax is generally lower than income tax, and in some cases, you may not owe capital gains tax at all. If your income fits the brackets below, you will owe 0% in federal capital gains tax (as of 2024):

  • Single/Married Filing Separately: Less than or equal to $47,025
  • Married Filing Jointly: Less than or equal to $94,050
  • Head of Household: Less than or equal to $63,000

If your income exceeds these thresholds, you may owe either 15% or 20% in long-term capital gains tax.

Depreciation Recapture

Depreciation recapture is a fairly complex area of tax code. Essentially, if your business owns depreciating assets and has used that depreciation as a tax deduction every year, you must pay taxes if you sell the asset.

If you sell your business (and the sale includes the depreciating assets mentioned), as the seller, you are responsible for paying depreciation recapture.

Tax Deferral Strategies

Handling the tax implications of selling your business can be confusing. A business broker can help you structure a deal that’s beneficial to you, but these are some of the tax deferral strategies we commonly recommend.

Reinvesting in a Qualified Opportunity Zone

If you are willing to use the capital gains from the sale to invest in an economically distressed area, you might be able to defer your taxes. However, in order to qualify, you must reinvest within 180 days of the sale.

Having the Buyer Pay in Installments

This is another way you may be able to avoid paying all capital gains taxes at once, and it’s also a viable option if your potential buyer is having trouble securing financing.

However, this arrangement has its risks as well — there’s always a chance that the buyer will default on the agreement. To avoid potential pitfalls, it’s wise to ask a business broker to help you structure this kind of sale.

Qualified Small Business Stock (QSBS) Tax Treatment

If you are selling a small corporation, you may be able to catch a break on capital gains tax by using the QSBS exclusion. This is a tax rule that exempts you from having to pay capital gains tax when you sell shares of a qualifying business.

However, there are stringent requirements when it comes to qualifying for this exclusion, so you should always consult an attorney or business broker before assuming you will benefit from QSBS tax treatment.

Selling Your Business? We’re Here for You

When you’re selling a company, it can often seem like there are countless loose ends to tie up. But if you don’t pay enough attention to each of those loose ends, you might end up paying far more in taxes than you need to.

That’s where we come in. At Sunbelt Business Brokers, we focus exclusively on sellers and buyers of small and medium businesses. Whether this is your first time selling a business or you have years of experience, we’re committed to structuring a deal that is favorable to you.

If you’re ready to sell or just want to check out our free business valuation calculator, get in touch with us today!

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