11/ 21/ 2005
by Joan Lisante
Selling a small business can be tough emotionally - it can also be expensive
Sue Mosher could have ridden into the sunset in a Lamborghini after she sold her business two years ago. But taking a lump payment for the sale would have run her over at tax time. Instead, Mosher planned ahead and took a note for part of the sale price, which allowed her to postpone paying taxes until the year she is paid. “Taking one big payment might have pushed me into a higher bracket, as well as tempted me to run out and buy a sports car,” Mosher says.
Doing her homework minimized Mosher’s taxes. The deal provided her with a modest down payment, along with a nine-year note. “This gave me a nice stream of income to get through my daughter’s college tuition years and helped me avoid capital gains taxes on a large lump sum payment.”
With a bit of planning and the right professional leading the way, selling your business can be a celebration rather than a tax headache.
How to Save When You Sell
1. Hire a good accountant familiar with small-business issues. This isn’t the time to be cheap. You’ll have lots of questions that need answers: Does this asset qualify for capital gains treatment? What can be sold on an installment basis?
2. Are you selling assets or stock? Many sellers prefer a stock sale—liabilities follow the stock, but stay with the seller in an asset sale. Also, selling assets can mean double taxation. You’ll pay capital gains tax on the value of the assets, assuming they are worth more than when you acquired them. Later, when the corporation is liquidated, you’ll owe capital gains tax on net proceeds of the sale.
To avoid the “second tax” when a corporation is liquidated, think about keeping the “shell,” or basic corporate structure. The IRS can levy a “personal holding company” tax on such a shell, so pay out any after-tax income as dividends.
3. Make sure assets are allocated or divided, so that most are subject to capital gains rather than ordinary income tax (15 percent versus 35 percent). You and the buyer must assign a portion of the purchase price to each asset.
4. If you’re selling to a larger corporation, structure a corporate reorganization by taking the buyer’s stock in exchange for your own. No tax will be due until you sell the stock received.
