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Thinking of
Selling Your Business?
Consider the tax
implications before deciding
How do you place a price on years of hard work? The answer to that
question depends on the type of business you operate. The first step you
need to take is to find a reputable business appraiser. A business
appraiser can guide you in placing a value on your assets, allowing you to
command a fair selling price.
The sale of a business is not usually a sale of one asset. Instead, all of
the assets of the business are sold. Generally, when this occurs, each
asset is treated as being sold separately for determining the treatment of
gain or loss. Assets are divided into two categories: tangible assets such
as real estate, furniture, fixtures, equipment, and possibly inventory,
and intangible assets such as goodwill and a customer list.
If you are operating a service business, chances are good that the value
of your business centers on your expertise. If that’s the case, your main
asset is most likely goodwill. If it is goodwill you created, you have
zero basis in the asset and the entire gain is taxed as capital gain.
The sale of tangible assets, such as fixed assets and inventory, generate
ordinary income. The sale of real estate can also generate ordinary income
depending on when the building was placed in service. If the building was
placed in service after 1986, the gain is taxed at the capital gain rates.
If you are incorporated, you can either sell your stock, or the
corporation can sell the assets. If the assets are sold, the corporation
pays the tax on any gain. You, as a shareholder of the corporation, do not
have a tax consequence unless the corporation liquidates and distributes
the proceeds of the sale to you in exchange for your stock. Different
rules apply if you are an S corporation.
It is important to determine what the potential tax consequences are prior
to signing the sales contract. If you want to defer the gain on the sale,
an installment agreement might be the best option.
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