If I Sell My Business, How Much Will I Pay in Taxes?

If I sell my business, how much tax will I pay? How do I calculate it? 

These questions are very common for sellers. However, the answer to how much tax you’ll pay isn’t the same for everyone. It depends on your business type and the structure of the sale.

We’ve examined the major influences on business sales tax obligations, the top strategies for reducing them, and how a tax calculator can help. 

Key Factors That Influence Tax When Selling a Business

Several factors determine tax obligations when you sell a business. These include business type, sale structure,  capital gains on the sale, and any depreciation you may have claimed. Here is a breakdown of these factors. 

Business Type

The business’s structure is the first key factor in determining due taxes when you sell your business. 

For example, corporate income earned by C-corporations is taxed twice in the US—at the entity level and the shareholder level. After paying corporate income tax, a corporation can distribute its after-tax profits to shareholders through dividends or hold them, leading to capital gains.

Sale Structure 

Another key factor is the sales structure. For example, you may receive a lump sum all at once for the sale of the business or receive installments. Or perhaps you’re offering owner financing to the buyer, allowing them to pay off a portion of the price over time with interest. 

Installment payments can spread out capital gains tax (CGT) obligations over several years as you receive the payments. 

Capital Gains vs. Ordinary Income

When you sell an asset for more than you bought it, you may be liable for CGT on the profits. 

CGT rates are typically lower than ordinary income tax rates, which are determined according to your specific income tax bracket. The GCT rate is a maximum of 15% for most people (except the highest income earning bracket). 

Depreciation Recapture

If you claimed tax deductions for your asset’s depreciation and then sold your business for more than its claimed book value, you'll have to pay taxes on the difference between that value and the actual sale proceeds.

If I Sell My Business, How Much Tax Will I Pay Calculator 

A business sale tax calculator helps you estimate your CGT due. 

Here is how to calculate how much CGT you’re liable for:

• Subtract the cost basis (original value or purchase price) from the sale price.

• Identify whether your capital gains are short- or long-term.

• To calculate the CGT due, apply the appropriate tax rate determined by the IRS for your business and tax bracket to your gains.

However, as explained above, your business type and sale structure will influence the total amount of tax you’ll pay. 

How to Minimize Taxes When Selling Your Business

Selling a business can come with a hefty tax bill if you're unprepared. The good news is that there are several strategies for minimizing taxes on the sale. By taking a few thoughtful steps now, you can maximize your profits and set yourself up for financial success.

Timing the Sale

The timing of the sale can impact the capital gains tax due. CGT rates are regularly adjusted for inflation, so if a seller knows CGT rates are due to increase, they can accelerate their sale and benefit from lower rates. If they expect the rates to decrease, they could delay the sale for the same reason.

With careful planning, you can minimize capital gains taxes. 

Installment Sales

If you sell your business as an installment sale, the tax you pay will depend on the number of installments and the amount paid in each installment. However, this payment structure eases the tax burden. 

In an installment sale, the buyer makes regular installment payments instead of one lump sum. This can spread sale proceeds over several years to defer some capital gains to future years.

Tax-Deferral Strategies

You could defer taxes on part of the sale of your business by reinvesting some of the proceeds. For example, you can leverage tax-deferred accounts or real-estate exchanges to defer CGT obligations. 

Contributions to tax-deferred accounts like an Individual Retirement Account or 401 (K) also allow you to postpone paying taxes until you withdraw funds. However, when you do, those withdrawals are taxed as ordinary income.

Another example is to use a 1031 exchange strategy. This allows investors to defer CGT when selling an investment property by reinvesting the proceeds into a similar investment property. Both properties must be US-based to qualify. 

Qualified Small Business Stock (QSBS) Exemption

Qualified small business stock (QSBS) is when a qualified small business issues shares. Investors who sell their QSBS before the end of the required holding period can defer capital gains by investing the proceeds in another company’s QSBS.

So, what determines whether or not it is a qualified small business? It must be an active domestic C corporation with gross assets not more than $50 million when and immediately after issuing the stock. The valuation is based on the assets’ original cost.

Maximize the Profits of Your Business Sale With Baton

Selling a business is a major financial event; of course, you’ll wonder how much tax you’ll have to pay. But understanding how taxes on business sales work makes the whole sales process less stressful, and you’ll know what to expect. 

Baton simplifies the entire process to help business sellers maximize profits and maximize their sales. Our business valuations include comprehensive data to give you an accurate market comparison and establish the best selling price for your business. 

This empowers you to make more informed decisions and get the best deal while considering financial implications such as tax liability. 

Sign up today to get started.