In today’s market environment, there are a lot of reasons why business owners would consider selling their business. But, whether they just want to take a well-deserved retirement, start a new project, or just get out ahead of various market pressures and rapidly rising inflation it’s absolutely crucial that they consider the tax implications of their sale.
Tax expert Anthony Cavaluzzi has some advice for business owners who are looking to sell:
1. Consider your asset allocation
According to Anthony Cavaluzzi, sole proprietors often overlook the importance of classifying assets when it comes time to sale. The IRS has seven different categories of assets, and each of them has their own capital gains tax implications. Hire a professional to negotiate your sale if you’re unfamiliar with this portion of the tax code.
2. Anthony Cavaluzzi says to look at the difference between stock and assets
Selling the assets of a corporation has very different tax implications than selling stock. If a business owner is selling his or her stake in a corporation, odds are the buyers will prefer to purchase assets because they can depreciate the assets on their tax returns. But sellers will want to classify as much of the sale as possible as stock in order to avoid capital gains taxes on their end.
3. Consider if an installment sale is right for you
According to Anthony Cavaluzzi, installment sales are a great way to spread out tax liabilities over several years. The disadvantage to this plan, however, is that the buyer could default on the sale midway through the agreement. This could have disastrous implications for the overall plan to sell the business.
4. Sell to your employees
One of the most overlooked methods to sell a business, according to Anthony Cavaluzzi, is to sell stock to its employees. Not only does this help the business to retain a lot of its value by retaining highly trained and knowledgeable employees, it can also allow the owner to sell pieces of the company gradually; spreading out taxes over multiple years. Furthermore, this method allows all of the assets to be sold as shares in the company, a situation that is highly advantageous to the seller.
If you’re selling your business or a stake in a business that you own a part of in the near future, it’s worth it to pay for professional advice in regards to the tax implications of the sale. For many business owners, the sale of their business is one of the largest financial transactions they’ll ever make. Anthony Cavaluzzi has seen simple mistakes such as misclassifying assets cost business owners millions of dollars in taxes.