Aspects of Selling Out
When you sell your business you're likely to face a
significant tax bill. In fact, if you're not careful, you can
wind up with less than half of the purchase price in your
pocket, after all taxes are paid! However, with skillful
planning it's possible to minimize or defer at least some of
The basic issue is that with any sale of a capital asset,
including business property or your entire business, you have to
pay income tax on your capital
gains. Ordinarily the gains are recognized (taxed) in the
year of the sale. Under current law, long-term capital gains are
taxed at a significantly lower rate
than ordinary income. For sales after January 1, 1998, if you've
held the asset for longer than 12 months the maximum tax on
long-term capital gains is 20 percent (and if you're in the 15
percent tax bracket, the maximum rate is 10 percent).
The taxable amount is your profit: the difference between
your tax basis and your proceeds from the sale. Your tax basis
is generally your original cost for the asset, minus
depreciation deductions claimed, minus any casualty losses
claimed, and plus any additional paid-in capital and selling
expenses. Your proceeds from the sale generally means the total
sales price, plus any additional liabilities the buyer takes
over from you.
If your business is a sole proprietorship, a partnership, or
an LLC, each of the assets sold with the business is treated
separately. So, the formula described above must be applied
separately to each and every asset in the sale (you can lump
some of the smaller items together, however, in categories such
as office machines, furniture, production equipment etc.).
Certain assets are not eligible for capital gain treatment; any
gains you receive on that property are treated as ordinary
income and taxed at your normal rate, which can be as high as
39.6 percent. The problem becomes one of allocation: if you
negotiate a total price for the business, you and the buyer must
agree as to what portion of the purchase price applies to each
individual asset, and to intangible assets such as goodwill. The
allocation will determine the amount of capital or ordinary
income tax you must pay on the sale (except in the case of
corporations, which have the option of structuring the sale as a
After the sale, the buyer will be able to depreciate or
amortize most of the assets that were transferred. Because
different types of assets are depreciated differently under IRS
rules, the buyer is going to want to allocate more of the price
toward assets that can be depreciated quickly, and less of the
price to ones that must be depreciated over 15 years (such as
goodwill or other intangibles) or even longer (such as
buildings) or not at all (such as land).
That's the basic story. But things are never that simple with
the IRS. There are a number of qualifications to the rules, and
issues that present planning opportunities for sellers (and
buyers) of businesses.
income vs. capital gains: gains on some of the assets
being transferred may have to be taxed at ordinary income
tax rates, rather than at the 20 percent maximum long-term
capital gains tax rate.
sales: if you defer receipt of the purchase price to
later years with an installment sale, you may be able to
postpone paying tax on your gains until you receive them.
taxation of corporations: for businesses organized as
corporations, the structure of the deal as an asset or stock
sale can have very different tax results.
reorganizations: where one corporation is buying
another, you may be able to structure the sale as a tax-free
- Be aware of state tax issues. In some states, sales tax
may apply to asset sales; some states tax stock transfers.
Also, many states and localities impose transfer taxes on
real estate or other assets.
Please note that our discussion of tax aspects is a very
broad overview, and presently covers only federal tax issues.
For more detailed information or advice pertaining to your
individual situation and your state and locality, consult your tax