Selling your small business can seem like a monumental task that requires attention to unending details. One of your top concerns should be an examination of the current tax laws on business sales to work them to your advantage. In concert with your accountant, it is possible to implement a number of ways to limit the expected tax bill and boost your profit on the sale.
Changing Corporation Status
This move can save you big on the Medicare surtax that was recently implemented during the Obama administration. It allows small businesses with an S-corporation status to avoid this tax. However, you must be an active business owner and sell your stock in the business to qualify for this tax break.
Creating an ESOP
Another good way to save money on taxes when selling your business is to create an Employee Stock Ownership Plan, or ESOP. With an ESOP, the company makes regular contributions to finance the purchase of stock and also finances the stock purchase. The company deducts the contribution from its taxable income. ESOP’s can be very flexible, and you will be able to write off the expense of buying the stock by the ESOP. Sale to the employees also helps to preserve the independence of the company and rewards the employees that have contributed so much to the success of the business. If you hold onto the stock until your death, you may no capital gains tax at all. ESOP rules are stringent and you should work in close collaboration with your accountant and attorney to accrue the full benefits of the system.
The Qualified Small Business Stock Exception
Selling stock that counts as part of the small business assets can have a distinct advantage in taxes when you sell, sometimes as much as 50 to 100 percent. However, the definition for this particular designation is strict. You cannot be a service business. Sometimes, it is possible to separate out the service component of your business and still qualify for this tax break. The separate business would have to be viable on its own for this part of the tax code to apply.
If you plan ahead with the ultimate sale of your business in mind, you and your accountant can find a number of smart and easy ways to cut your tax bill on the sale and improve your takeaway profit.
Deferring Income and Other Tips
Your accountant may suggest other ways to save on taxes that can be advantageous for you. If you finance part of the purchase of the business, you may be able to defer the income until later years. An installment sale may be part of this type of tax planning. Finding ways to take the profits as ordinary income instead of capital gains can also save on your tax bill. If you can re-organize part of the business to a tax-free status, you can save a considerable amount on your tax liability. Talk to your accountant, about depreciating or amortizing some or all of the assets after the sale. Because of the changing nature of the tax code regarding business sales, you may be entitled to new benefits by the time you’re ready to sell.