Did you know that over 10,000 businesses are sold in the United States each year? It’s no surprise then that some business owners are concerned about capital gains tax when it comes to selling their businesses. The good news is that you may be able to avoid or reduce your capital gains taxes when selling a business.
Let’s take a closer look at what you need to know.
Prepare Yourself Appropriately
One way to minimize the amount of capital gains taxes you owe is through proper planning and preparation. Before you sell, you should talk to a tax advisor to make sure you understand the full tax implications of the sale.
This includes understanding how capital gains taxes will be applied, as well as any other applicable taxes.
Organize Your Finances
It’s important to have an organized financial structure when selling a business.
This increases the chances that you can claim any deductions or credits that may be available. For instance, if you can show losses from the sale of assets or other business expenses, it may lower your capital gains tax liability.
Similarly, any depreciation deductions you are eligible for can also reduce your taxes.
Look Into 1031 Exchanges
The Internal Revenue Service (IRS) allows certain taxpayers to exchange certain properties for other like-kind properties in order to defer capital gains taxes. This is known as a 1031 exchange and it can be used when selling a business.
It’s important to understand the rules and eligibility requirements of this process, but if you meet the criteria, it can help you avoid having to pay capital gains taxes on your sale.
Sell to a Family Member
If you’re selling your business to a family member, in most cases the capital gains tax will be deferred until the recipient of the sale sells or transfers the property.
This is an effective way to avoid having to pay taxes on the original sale and allows you to keep more of your proceeds. So, don’t overlook this option.
Sell to an Employee
Another way to avoid capital gains tax when selling a business is by selling to an employee at your business. Depending on your individual situation, you may be able to structure the sale in a way that allows you to defer or avoid taxes.
It’s important to talk to an experienced tax advisor about this option to understand any potential implications.
Consider an Installment Plan
If you are eligible, another potential way to minimize capital gains taxes is by utilizing an installment plan.
With this type of sale, you can receive payments over a period of time, which helps spread out the impact of the taxable gain and can result in lower taxes. As you might guess, this is ideal for large-value sales. However, it’s also a great choice for those who need the majority of the money they will gain from the sale.
Transfer Through a Charitable Remainder Trust
If you are looking for a way to avoid capital gains taxes and also contribute to a charitable cause, setting up a charitable remainder trust could be an option.
This type of sale allows you to transfer the business ownership to the charity, while still retaining certain benefits such as income or tax credits. Although not quite as common as the other methods, it is still a viable option to save money on capital gains taxes.
Work With a Professional
It’s important to understand the tax implications of selling a business, so it’s wise to work with a professional who can advise you on the best strategies for avoiding capital gains taxes. With their help and guidance, you can take steps to minimize your tax liability and keep more of the money from the sale.
When searching for tax services to work with, make sure they are licensed, knowledgeable, and have experience in the field.
You should also take a look at their past reputation so you can gain insight into what you can expect from them. For instance, if many clients say that they are not communicative or offer poor results, you should continue your search elsewhere.
What Should You Expect to Pay in Capital Gains Taxes by Default?
Capital gains taxes vary depending on individual circumstances, but the general rate is 15-20% of the net gain.
However, if you are in a higher tax bracket or if your capital gains meet certain thresholds, then you may be subject to an additional 3.8% Net Investment Income Tax (NIIT).
The good news is that working with the right professional will help you minimize the amount you need to pay. Be sure that you take this into consideration when moving forward. In some cases, you could save yourself tens of thousands of dollars.
Are There Other Ways to Reduce My Capital Gains Taxes?
Yes, there are a few other ways in which you may be able to reduce or avoid capital gains taxes when selling a business. These include retirement plans such as 401(k)s and IRAs, as well as capital loss carryovers.
Additionally, some states may offer tax credits in certain situations. It’s important to consult a qualified tax advisor to determine what options are available to you.
Selling a Business Doesn’t Have to Be Overwhelming
Initially, selling a business may seem daunting. The good news is that the guide above has everything you need to know to make the process simple.
Looking for more information about what we can do? Reach out to us today to see how we can help.