In part one of this two-part blog series, we went over some of the basic factors involved in understanding the tax ramifications of a business sale. Business sales are a form of income, meaning basic tax laws apply to them, and it’s important to ensure you understand the important crux points here so you don’t have to deal with the IRS for one of several possible issues.
At Utah Business Consultants, our business brokers are happy to help with every area of selling your business, including potential tax ramifications that may be present and how to evaluate these. In today’s part two of our series, we’ll dig into a few more important considerations within this realm.
Capital Asset Classification
Within a business sale involving assets, which we went over in part one, the term used will generally be “capital assets.” Such capital assets can be classified in three general ways:
- Real property: Real estate owned by the business, including land, buildings and others. In many sales, small businesses will simply sell real property if they’re relocating or closing. Real property is taxed as a separate capital asset unless the buyer is purchasing the whole company entity, which includes real property holdings and allows the buyer to take over the building.
- Depreciable property: Property that loses value over time, such as office chairs, computers, furniture and related items used in business operations. Some businesses will try to sell depreciable property if it’s being replaced as part of the sale – the IRS treats such sales as gains or losses based on current value, and this is what will be used to determine the tax rate. For this reason, because the value of such items is almost always lower when sold than what it was purchased for, older items will be taxed at a lower rate.
- Inventory property: In other cases, a business may sell bulk inventory to a buyer as part of their sale. This is different from individual product sales to customers for a profit – the IRS actually considers such bulk sales to be a capital gain rather than a property sale, meaning tax rates will generally be higher.
Are Tax-Free Sales Possible?
We’re all looking for ways to minimize the taxes we pay, including business owners completing a sale of their business. And while it isn’t usually possible to conduct a business sale without any taxes, there are a few exceptions: One common example is a sale using stock exchanges – if the right IRS provisions are met for these kinds of deals, taxes might be avoided altogether. Asset transfers can also be tax-free if the seller receives 100% buyer’s stock – that is, if the exchange remains completely non-cash. Our team will give you further details here if needed.
For more on tax ramifications of business sales, or to learn about any of our business sale or business broker services, speak to the staff at Utah Business Consultants today.