Tax Plan Ahead for a Higher-Priced Business Sale

Leverage the Tax Code for a higher-priced business sale.

By Bruce Jones, Founder & Chief Tax Architect ·

You must take a proactive and thoughtful approach to tax planning if you want to sell your business for a top-dollar price. Value drivers such as a motivated management team, an operating system that improves sustainability of cash flow, a realistic growth strategy and effective financial controls all help, but cash flow is one of the key factors that reaps greater value when appraising a business for sale. Effective, long-term tax planning sustainably maximizes that cash flow.

What tax factors impact the gain on selling a business? What obligations can owners be faced with once they decide to sell?  Here are just a few to think about.

What is Included in the Taxable Gain Received by the Seller?

The IRS uses terms like consideration, interest and tax basis when a business is sold.  Consideration is what the seller receives from the buyer in exchange for the business. These considerations can include cash in business accounts and liabilities from which the owner is relieved (considered income by the IRS).  Interest is what the seller owned in the business that was sold. And tax basis, an important figure, is the seller’s original investment and added contributions made in the business.

To determine the tax on the sale, first take the sale price and subtract from it the sale and escrow costs, giving you the net sale proceeds.  From that figure subtract the tax basis, leaving you with the taxable gain. A business or stock of the business owned more than 365 days become long-term capital gain and qualifies for a lower tax rate. This applies to most businesses sold.

Planning Ahead Can Pay You Greater Dividends in the Future

Odd as it may seem, the moment you buy or start a business, you must also begin to think about the exit strategy you will use when you decide to sell.  Ask yourself, “How can I structure my enterprise to gain the greatest value while running it and also minimize the tax bill when sold?”  Start by clearly documenting the investments you made in the business over the years to add them to your tax basis, to lower the taxable gain and raise the net profit you gain on sale.

Look for Preferential Tax Treatments

Planning strategies to capture tax credits and deductions significantly reduce what you owe each year. But, they cannot all be used for every business structure. Certain medical deduction strategies can be implemented for a C-corporation, for instance, but cannot be used for an S-corporation, sole proprietorship or partnership.

How a business is structured can also have a significant impact.  For example, if the business is a C-corporation, the sale can trigger a “double taxation” problem where the gain is first taxed at corporate tax rates and then the distribution to the shareowners is taxed again as personal gain.  This is not usually the case if the business is an S-corporation, LLC or partnership.

Plan ahead to address these types of concerns to put more profit in your pocket at close of escrow.

The list goes on…

This is, of course, just a short section of a long list of tax planning considerations that you need to navigate in detail well before putting your business up for sale. Other topics might be:

Selling a business can be a complex affair. Start tracking these discussions today with your CPA, and add a qualified tax planner to your team.  Begin by improving today’s cash flow by identifying and applying missed opportunities and taxes you may be wastefully paying. This tax-advantaged cash flow will add to your bottom-line over time and improve the value of your business when you decide to sell.

Even if the sale of your business is still years away, you must begin planning for it now.

 

 

Questions people ask

How is the taxable gain from selling my business calculated?

Taxable gain is calculated by taking the sale price, subtracting sale and escrow costs to get net sale proceeds, then deducting your tax basis. The tax basis includes your original investment and additional contributions, so tracking these over time lowers your taxable gain and increases your net profit.

What business structures face double taxation on a sale?

C-corporations can face double taxation when sold. The gain is first taxed at the corporate level, and then any distributions to shareholders are taxed again as personal income. S-corporations, LLCs, and partnerships generally do not have this issue, but planning ahead is crucial to avoid surprises.

Why does documenting my business investments matter when planning for a sale?

Documenting your investments increases your tax basis, which lowers your taxable gain. Each documented contribution or improvement can reduce what you owe in taxes when you sell. Failing to keep clear records often results in a higher tax bill from underestimated basis.

Do all tax credits and deductions apply to every business type?

Not all tax credits and deductions are available to every business structure. For example, certain medical deduction strategies apply to C-corporations but cannot be used by S-corporations, sole proprietorships, or partnerships. Your structure determines which credits and deductions you can claim each year.

When should I start tax planning for a potential business sale?

Tax planning for a business sale should begin as soon as you start or acquire the business. Early and ongoing planning helps maximize value, minimize the tax bill when selling, and plants the groundwork for tracking investments and applying missed opportunities. Waiting until a sale is near usually limits options.