Selling your business and keeping the gains
A business owner looking to get out checks with Ask FSB on minimizing the tax bill.
Emile Dauphinais, Charlotte, N.C.
I’m looking to sell my business. What portion of the sale price is counted as capital gains? How long does one have from the sale of a business to use the profits before capital-gains taxation come into play? Will purchasing another business with the profits offset the gains? And does the new business have to be of the same type? I am now in retail, but might want to consider real estate.
By Lenora Chu, Fortune Small Business contributor
Dear Emile: What’s counted as capital gains depends on whether you’re selling stock or assets. Likewise, how your gains are treated depends on whether you’re selling stock or assets of the business.
Proceeds from the sale of stock is treated as a capital gain, says Rob Nowak, senior tax manager of the national accounting and consulting firm Clifton Gunderson.
The capital-gains rate would be determined by the length of time you held onto the stock and what ordinary tax bracket you fall into, says Richard Beauchemin, owner of Charlotte, N.C.-based Carolina Accounting and Tax Service. He points out that the sale of assets will be treated differently depending on the classification of assets sold. These classifications include capital assets, depreciable property, real property and inventory.
Some assets would be taxed at the ordinary rate, some at the capital gains rate, and others at the recapture rate of 25% for certain real-estate holdings, says Beauchemin. Gains or losses on the sale of inventory, for example, are treated as ordinary income and taxed accordingly.
How the assets are held will also determine how you are taxed. For example, asset sales by C-corporations are taxed at corporate tax rates regardless of the holding period or the type of assets sold, Nowak says . These rates start at 15% and step up to as high as 38% depending on the income level for the corporation, Beauchemin adds.
Asset sales by S-corporations generally result in long-term capital gains taxed at the 15% rate (or 25% for certain real estate interests). However, ordinary gains taxed at individual rates can also result, Nowak says.
The timeframe for taxation
As for timeframe, capital gains taxes are realized immediately, says Beauchemin. They are never deferred. Purchasing another business may offset some of the gain through accelerated depreciation, or through expense write-offs on new equipment purchases, says Beauchemin. However, the gain would not be offset dollar for dollar. You have 180 days to reinvest the sale proceeds in a qualified replacement property, adds Nowak.
The business does not have to be the same type. However, the type of assets you purchase would determine the amount of gain you could shelter, Beauchemin says.
All the experts say you should consult your tax advisor for specifics.
Disclaimer: This column provides general information only and is not intended to replace the services or legal advice of an attorney or CPA. Always consult a lawyer or accountant regarding specific legal or financial issues.
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DiggYou have to consult this matter with professional accountant. But as I know, sell of your business has nothing to do with capital gains. In order to figure it, your accountant must check your profit, gains, loses, depreciation, and earnings.
Emily, as I understand, your business wouldn’t be taxed as capital gains, but you have to discuss it with financial specialist. Your financial specialist must verify your business. He must check your property depreciation, gains and loses.
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This article is really helpful. Trying to prepare to sell your business is like a second job. In addition to your blog, I also came across a site that actually helps you to sell your business for free, its called biztrader.com. Look forward to reading your next post.