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Posted by Tiffany Gaskin

Tax Implications of Selling a Small Business

Tax Implications of Selling a Small Business

Uncle Sam benefits from people that sell their startup businesses. The act is considered a collection of tangible items, including real estate, inventory, machinery, and intangible assets like trade name, accounts receivable, or goodwill. Suppose you consider selling your small business, review the tax laws to avoid penalties. The law imposed on small business sales is complex, including tax liabilities. Many small businesses have financial savings that can be affected by the tax code. 

To be on the err side, hire a tax professional before you proceed with selling your small business. Anyways, here are some tax implications of selling a startup business.

Tax Management Tips

You can implement a couple of tips over some years to reduce the tax amount filed to the IRS. Here are some management tips:

Deferred Payments

  • Many homeowners prefer getting their buck in full before letting the company go. This seems like the best choice, but receiving the amount in full affects your taxable amount. The act increases your annual tax amount, placing you in a higher tax bracket. However, this may be a good thing for some. But ensure you review the tax code before selling your business.

  • If you go through the deferred payment option like seller-financed loans or earn-out payments, you will have control over your tax amount and avoid higher tax brackets.

  • Deferred payments allow you to place collateral or additional measures protecting you against buyers unable to make payment. 


  • Before concluding the sale, ensure you agree with the buyer on the portion of the business price to be sent as part of the total amount.

  • The business owner should place assets on capital gains to earn a lower tax rate instead of other assets that attract a higher tax rate. 

  • However, you may need help convincing a buyer of these terms. But, you have to negotiate these terms with the buyer to avoid the IRS rules on your selling price. The best part is to consider the selling price under capital assets. 

Small Business Types and Taxes

Businesses are divided into sole proprietorships, S corporations, and partnerships under pass-through entities. Each small business has different implications regardless of the assets. Furthermore, companies like sole proprietorships, LLCs, and partnerships assets are taxed differently.

The IRS treats LLCs, partnerships, and sole proprietorships under S corporations with some privileges like avoiding double taxation. The IRS has no space for LLCs and considers them as either partnerships or sole proprietorships, determined by the number of investors, and sometimes taxes the LLCs under S corporation. 

On the other hand, corporations and shareholders may face double taxation when an asset is sold regardless of the corporate or individual shareholder income level. However, the corporation can have tax deductions by operating losses or business credit layovers. 

How Business Sales Are Taxed

The IRS does not consider the sale of a business as a single asset. Instead, they treat all business assets separately except in some conditions. Furthermore, a company is taxed as a long-term capital gain or an ordinary income. The two are treated differently. For example, selling a business asset that the company has owned for over 12 months is considered a long-term capital gain. The IRS imposes a 15% maximum tax on capital gains. Assets regarded as ordinary income are taxed with the taxpayer’s tax rate. Currently, taxpayers are taxed at 37% on the federal level, double the long-term capital gains tax rate.

In summary, taxpayers that own small businesses and intend to sell should visit the IRS tax code on their publication. Being aware of the tax implication will save you some headaches and some bucks.



Tiffany Gaskin
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