Tax Considerations of Selling Your Business

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Whether you're selling your business to start a new venture or you're looking to convert your equity in the business into cash, selling your business is often a viable idea. But there are a few key aspects that come along with the sale of a business, which can have tax implications. Here are some essential tax considerations to take into account when selling your business that you should know:

Sale Allocation

There are a whole host of items that may be subject to tax when you sell your business from machine equipment to furniture. Some items can be treated as typical income while others can be treated as capital gains. If the assets are treated as a capital gain, they are typical taxed at a lower rate than if they were treated as regular income. Since each item can have a different tax treatment, it's vital to pay attention to the sale allocation. However, negotiating allocation can be challenging for sellers. Buyers have the goal as paying as little taxes on the sale of a business as possible, so they would want to allocate as little as they can to the sale of assets to avoid possible taxation or being taxed at a higher rate.

Inventory

If you sell inventory, then you may owe tax on this sale. For instance, sellers of businesses in the state of Washington must pay a Business and occupation tax or B&O in the event they sell inventory. Taxes may also be owed if you get a reseller permit. You will still be subject to retail sales tax and retailing B&O, if you never end up getting a permit for reselling your inventory.

Excise Tax

Another important tax to consider is excise tax. Certain business activities, equipment and services are taxable. For example, if you sell your fishing company, the new owner of the company will likely have to pay federal excise tax on fishing supplies, such as fishing lines, fishing vests and hooks. Tax may also be owed on consumable supplies, such as office supply or magazine subscriptions, when the buyer purchases assets, such as office equipment and supplies. That's why the buyer would want to allocate as little to the sale of supplies and office equipment. Moreover, the buyer may be resistant to include these amounts as part of their sale allocation since tax deductions for property often must be spread out through the life of the asset.

You may also be subject to a real estate excise tax. For instance, the state of Washington requires sellers to pay a real estate excise tax in the event of the sale of real estate, such as the garage you are selling for your auto body business. This also applies if you have a controlling interest, such as owning half or more of a partnership of a banquet hall that is trying to sell the property.

Final Thoughts

Selling your business doesn't stop at signing over your property and assets to the new owner. You have to think about the tax implications involved. Figuring out the taxes you owe due to the sale of a business can be tricky, but you don't have to do it on your own. You can take advantage of professional tax services to get the help you need from a reliable team of tax experts, such as Honest Buck Accounting.