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How Much Tax to Pay When Selling a Business​

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Written By Matt Perkins

Published February 4, 2025

Updated February 4, 2025

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How Much Tax to Pay When Selling a Business​

When you sell a small business, it generates income and thus involves taxes. The way you structure the deal will, however, make all the difference in how much of the sale price is taxed and, more importantly, how much you get to keep. These include the structure of the sale, the current arrangement of the business, cash or installment payment, and other considerations.

Key Takeaways 

  • Sales Tax refers to the capital gains tax rate, which, after it is collected, is used for many infrastructure purposes in the local state. You can also see it as a corporate social responsibility. 
  • There is a difference between asset sale taxation and stock sale taxation. While the former is imposed on small businesses for the sale of business assets, the latter is imposed on the sale of stocks by larger companies.  
  • There are strategies for reducing taxes when selling a business, and they include installment sales, charitable remainder trusts, and opportunity zones. These three options are how you minimize your tax bill when selling your business

Types of Business Sale Taxes 

In selling your business, understanding the different types of taxes is critical to the smooth calculation of your tax bill. Sales taxes vary in nature, both at state and federal levels, each affecting buyers and sellers.

General Sales Tax is usually levied on goods and services, and it is generally a percentage of the sales. In retail contexts, sales tax is imposed on a product at its highest sale value after successive stages in its production and distribution. For example, the taxes on consumer products, such as clothing items, are calculated after each producer, wholesaler, and retailer has added their corresponding margins.

You should also consider the capital gains tax on business sales, which is levied on the gain made from the sale, and the results of income tax. Being aware of the difference between state and federal taxes is essential for compliance and helps prevent unexpected financial liabilities. 

Calculating Tax Rates 

Sales tax is calculated as a percentage of the retail price. To find it, you need to change the tax rate to a decimal and multiply it by the retail price of the product or service. If an item is priced at $100 and the sales tax rate is 7%, then the sales tax will be $7.

You should note that some states do not charge sales tax. States such as Alaska, Delaware, Montana, New Hampshire, and Oregon do not have state sales taxes. The business sales tax rate can vary significantly across the U.S., with rates from 0% in the previously named states to 7.25% in California. In contrast, states like Indiana and Tennessee have rates of 7%. Additionally, many states impose local or municipal taxes that can be added to the sales tax, such as in Alaska, where local rates range from 1% to 7%. Online purchases may also be subject to a sales tax if the seller has a physical or an operating website. 

In addition to sales tax, business sellers also have to consider the capital gains tax rate and other tax implications that vary by location. Understand that carefully looking at the factors that affect tax rates is essential for correct calculation and compliance at the time of sale. 

Tax Calculation Methods 

When selling a business, the method of sale determines the amount of tax payable. There are two major classes of sales of companies, namely asset sales and stock sales, each with different tax implications.

In asset sale taxation, the buyer purchases selected business assets, such as equipment, inventory, and intangibles. Taxes are computed based on the type of asset being sold, along with its depreciation status. Short-term assets are subjected to ordinary income tax rates, whereas long-term assets could receive capital gains tax rates.

On the other hand, stock sale taxation involves the selling of shares of ownership in the business. This method is more common for giant corporations and usually results in more straightforward tax calculations for the seller because the sale is treated as one capital gain amount. Buyers in stock sales do not have the benefit of deductions for depreciation, and this may affect negotiations.

How to Minimize Taxes When Selling a Business 

With proper planning, sellers can minimize their tax burdens and pave the way for a smoother process of sale

The strategies for reducing taxes when selling a business include installment sales, selling through a charitable remainder trust, and investing in Opportunity Zones. Using Opportunity zones involves deferring and possibly reducing certain capital gains taxes by reinvesting one’s proceeds into real estate development in areas that have been recognized as economically distressed.

Although there are substantial tax benefits, Opportunity Zones have a couple of downsides; you will have to reinvest their funds almost immediately, which means no liquid cash upfront. 

Key Tax Considerations

Understanding tax implications is a vital aspect of selling a business, whether to optimize profits or reduce liabilities. A critical decision is whether to sell the company’s assets or stock. This becomes a significant tax consideration since buyers usually prefer asset purchases due to the depreciation benefits, whereas sellers prefer stock sales because this can lower capital gains taxes.

It is also worth noting the reporting requirements, which include complete documentation of the sale, are necessary for tax compliance. In addition, sellers should research available tax credits or exemptions, such as reinvestment options or transaction tax breaks.

Working with legal and financial experts like investment bankers or Mergers and acquisitions professionals to help make informed decisions and understand all the pros and cons of each option. Thoughtful planning around these critical factors can help you achieve the best results, safeguard your legacy, and, lastly, offer you a smooth transition to the subsequent owners. 

FAQ

Do I Get Taxed for Selling a Business?

Yes. Taxes are usually paid when a business is sold. The most significant tax you will be worried about is the capital gains tax. The capital gains tax rate is generally below the income tax rate, so you need to know how this tax applies when you sell your business.

How are Capital Gains Tax Calculated? 

The calculation of capital gains for the sale of a business is simple and easy. You simply multiply the profit from the sale by the capital gains tax rate.

Is Goodwill Taxed When Selling a Business?

Goodwill is not considered a deductible expense for tax purposes and, therefore, adds up to the total sale value of the business. 

Can I Use Tax Calculators?

Automated tools like Tax calculators can help simplify the process of calculating your business sales tax. However, a more efficient method is hiring experts to give an accurate estimate of the taxes. 

Bottom line

Now that you know some of the basics about the taxation involved in selling your business, take the time to sit down, contemplate your situation, and have a recap of critical tax considerations involved in the sale process. You can also figure out just how you can structure the sale to minimize taxes owed. Need for guidance? Contact WebsiteClosers.com for professional solutions to your tax returns.

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