Selling Your Business Assets
Take advantage of
the installment method
In most cases, there is generally no way to
completely avoid paying tax on the gain from the sale of your business
assets. If you exchange a business asset for a new asset that is of the
same type, you may qualify for a like-kind exchange and defer your tax
liability until you sell the replacement asset. However, this strategy
won’t work if you are selling your assets and retiring. There are ways you
can sell your assets and at least defer paying the tax on some of the gain
until the year you actually receive the money.
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Selling your assets and reporting the gain using the installment method
enables you to collect the sales proceeds in years following the year of
sale. The installment method of reporting gain automatically applies any
time you sell assets and receive proceeds in the year following the year
of sale. You may elect out of the installment method by reporting all the
sales proceeds in the year of sale, regardless of when you actually
receive them, and paying tax on the gain.
For a valid installment agreement to exist, you must
have an adequate rate of interest stated in the contract. This interest is
taxable to you as you collect the payments. If no interest is included in
the contract, it will be imputed, resulting in part of each payment being
taxed as interest. Interest is always included in income in the year you
receive the payment.
If you are looking for a way to spread out your taxable income and tax liability,
utilizing the installment method is a good strategy. By reporting the gain
over several years rather than all in one year, you may avoid being pushed
into a higher income tax bracket by the large, one-time gain.
Just remember, ask a
fair price for your assets and include an adequate interest rate in the
contract.
