You’ve been approached about selling your business. After phoning your spouse to share the good news, you call your succession planning advisor. The first thing you’re asked is: Did they offer to buy the stock or the assets? There are tax differences between the two.
Let’s say they’ve offered to buy your stock. You are preferred position. From a tax standpoint, you're only going to ever have one layer of tax - you’ll pay capital gains tax on the basis you have in the entity versus the difference in what you’re being paid. All your liabilities go with the sale of the company, but so do any tax attributes you may have accumulated in the business (so that Net Operating Loss you were hanging onto is now gone).
Typically a buyer will look to acquire the assets of a target for a number of reasons, with one of the biggest being that the buyer can depreciate or amortize those assets. But what does that mean to you, the seller? Well, the first thing you need to determine is what type of entity you’re in: a C corporation? Or a pass-through entity? That’ll determine the amount of tax you’re going to pay.
In a C corporation, the sale of assets are all taxed at the current income tax rate of the corporation, currently 21%. The remaining 79% is available to use how you want, probably as a distribution to yourself. But wait, don’t forget that second layer of tax to consider, the one on the actual dividend to yourself of the net remaining cash after taxes.
Maybe you had a good advisor who knew that you may one day have to sell your assets and suggested you create your business in a pass-through entity (i.e., S corporation or partnership). If this is the case, sale of the assets is passed through directly to you (hence the name) and you pay tax directly on the gain recognized in the company. In this environment, you could have both ordinary and capital gain treatment on the sale of the assets, which could be anywhere from an additional 13% of federal tax if items are skewed more toward the ordinary income items. The net cash received can then be distributed to you tax free to the extent of your tax basis in the entity.
All of this can be very confusing and can have an impact on the amount of after cash proceeds available to you in any transaction. If you’re in the process of selling your business and want to better understand the tax implications, contact a member of the Schneider Downs Succession Service Group to start a discussion.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.