Tax Consequences of Selling a Business

Deciding to sell your business can be difficult and exciting at the same time. Not only are you emotionally tied to your business, but the sale of it can be complicated because you must account for all of the property and assets being sold. The IRS requires the seller to pay taxes on any gains from the business, so it is imperative that you fully understand the tax consequences of the sale.

Your business is considered a capital investment by the IRS. Even if you sell the company for a lump sum payment, the IRS reviews the transaction as a sale of each asset owned by the business. This means that each individual asset must be valued and the valuation recorded. Thus, it is typically necessary to have your business professionally appraised to determine a fair selling price. Not only will the buyer want to know the fair market value of the company, but so will the IRS.

The seller must pay capital gains taxes on the earnings from the company. Gain is calculated by subtracting the owner’s cost of acquisition for business assets (known as basis) from the selling price (at fair market value) of the business. The resulting dividend is considered a taxable gain. The gain on the sale of the business must be calculated whether the transaction is for the sale of business assets or the stock of the business.

If you exchange the business for other business assets, you do not have to pay capital gains tax. The IRS permits you to conduct a “like-kind” exchange on business assets. It is possible for you to sell your company assets before you acquire new assets, but the IRS requires you to secure the new business assets within 45 days. The final transaction must be completed within 180 days of selling all assets. This type of transaction is commonly referred to as a 1031 exchange.

You must also pay careful attention to IRS rules regarding installment sales to related parties. A sale over a period of years to a partner or parent company may need to be reported as a total sale in the initial tax period based on the relationship of the parties.

Let us help answer your questions and provide you with the advice and guidance you need. Nielsen Law Group has offices in Chandler, Tempe, Gilbert, AZ and Redlands, CA. Our attorneys and professional staff combine their in-depth knowledge of the law with practical and efficient strategies to determine the most effective approach to each client’s unique situation. Contact us today.


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