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.<\/p>\n

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.<\/p>\n

Ask your accountant or CPA, but when you sell a business, the short answer is you pay capital gains tax.<\/p>\n

Capital gains means you pay tax on the gain, which is different than income tax.<\/p>\n

Income tax is generally higher. Capital gains is generally lower.<\/p>\n

If you sell a business for $800,000 it is not considered $800,000 of income.<\/p>\n

It is actually advantageous to sell a business because you will generally pay less than $800,000 you received by earning it.<\/p>\n

Capital gains also typically affects the profit, only.<\/p>\n

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.<\/p>\n

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.<\/p>\n

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.<\/p>\n

However, this number also changes when it is a short term capital gain or a long term capital gain, which is defined by time.<\/p>\n

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.<\/p>\n

You should account for approx. $4 million in taxes off the sale.<\/p>\n

Your CPA might advise you to value certain parts of your deal in an asset purchase agreement such as inventory, goodwill, etc.<\/p>\n

This will affect what is taxed at capital gains, income, and what is not.<\/p>\n

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.<\/p>\n

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.
\nIf 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.<\/strong>
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