Tax planning is essential to selling a business, as it can help maximize the after-tax proceeds available to the business owner and their family. The tax implications of a business sale can be complex and depend on various factors, such as the type of business entity, the length of time the business has been owned, and the sale structure. It is important to consult with your tax professional early on so they can advise you on options to help mitigate tax consequences. Â
If your business is a C corporation or S corporation, deciding whether to structure the transaction as a stock sale or asset sale may have a meaningful impact on your overall tax burden. Generally, a stock sale is preferable from the seller’s lens. In a stock sale, the seller’s profits are taxed at favorable long-term capital gains rather than ordinary income rates. In contrast, asset sales generally generate a combination of ordinary income and capital gains depending on how the sales price is allocated. Remember that if you have a C corporation, you may also be subject to double taxation, which could take a significant bite from your business sale proceeds.Â
The timing of receipt of the proceeds may also impact your tax liability. An installment sale allows the buyer to pay the seller over time rather than the full purchase price upfront. This allows the seller to spread tax liability over a more extended period, potentially reducing the seller’s tax burden in any year. However, it is important to note that an installment sale may carry some risks for the seller, such as the risk of default by the buyer or increasing tax rates in the future. Â