Tax Implications on a Business Sale
Sometimes to consider in a M&A deal are the taxes involved. We are not accountants, but we want to clear up some general misconceptions as it pertains to a sale.
With the question of how much taxes do you have to pay if you sell your business, this is obviously a question that depends upon various states.
Ask your accountant or CPA, but when you sell a business, the short answer is you pay capital gains tax.
Capital gains means you pay tax on the gain, which is different than income tax.
Income tax is generally higher. Capital gains is generally lower.
If you sell a business for $800,000 it is not considered $800,000 of income.
It is actually advantageous to sell a business because you will generally pay less than $800,000 you received by earning it.
Capital gains also typically affects the profit, only.
Meaning, you subtract the purchase price (what you paid to acquire the business or asset) from what you sold it for. Assuming there was a purchase, in the first place.
Hence, whatever the profit would be, is what you pay tax on. The capital gains tax rate typically depends upon your tax bracket which is based upon your income level.
In most scenarios, most people pay 15% or 20% when they sell a business, of the profit. Again, you have to contact your CPA to understand your expectations.
However, this number also changes when it is a short term capital gain or a long term capital gain, which is defined by time.
So, if you bought a business in 2020 for $10 million and sold the business for $30 million in 2023, you would pay capital gains on the $20 million profit.
You should account for approx. $4 million in taxes off the sale.
Your CPA might advise you to value certain parts of your deal in an asset purchase agreement such as inventory, goodwill, etc.
This will affect what is taxed at capital gains, income, and what is not.
Also, if there is any real estate attached there will be taxes on the profit there unless you can do something called a 1031 Exchange, which is where you park money from the sale of a commercial property, until you find and locate a property within a certain time period to roll that money in, to defer taxes to the future.
However, everything you sell, you should talk to your CPA to see what the affects of the sale are on your tax filing for the quarter/year.
If you would like to hop on a call with us to go over things related to acquisitions and general business overview, please schedule a time here. We do a one hour deep dive where we go over your needs as it relates to acquisitions & business expansion, and then we go on the hunt for you to line up a business that fits.
If you want to work together on a deal, we would love to get the opportunity to represent you and see how we can help you. Reach out to us through phone or email.
Phone – (800) 773-1523
Email – acquisitions@Jarbly.com
Leader in Acquisitions with Expertise in Representing Sellers & Buyers on Deals
Jarbly is a leader in acquisitions with expertise in helping with listings, negotiations, LOI's, asset purchases, company purchases, and real estate purchases. JARBLY has access to high net worth individuals if you are on the sell-side and businesses that may be of interest to you if you are on the buy-side.