Running your own business is a rewarding experience, but it can get pretty stressful. Many business owners enjoy the fruits of their labor when they sell their business. But selling a business is not easy, especially if you have a small business. Selling a business can mean either cashing out or staying on as an employee. Selling your business may be an option if you are under too much stress from your business, there is a bad market for your industry or you want to retire.
Selling a business is a complex process that requires a lot of planning, effort, and time. The end result can be very rewarding, but that doesn’t mean that you have to rush through the process. By taking the time to plan ahead and make the right decisions, you can ensure that you maximize your potential benefits from the sale. Here are nine financial and tax benefits of selling your business, if you are serious about selling your business.
1. Deduct certain costs of acquiring or producing assets that are used in your business
For example, let’s say you bought a car that you use for your business. If you are going to claim any deductions as a self-employed person, you have to use the cash basis recordkeeping method. This means you would deduct the business portion of your expenses right away, as you incur them. Let’s say you were driving around town for your business once and you had to fill up your gas tank. You would divide the amount of gas by the number of miles you drove to get a per-mile cost. Then you would multiply that amount by the number of miles you drove for that trip. If you drove 40 miles that day, and it cost you $40 to fill up, then you would deduct $10 from your income for that day. Remember, you claim any deduction as a self-employed person, you have to use the cash basis method.
2. Claim deductions for the costs of selling your business
The process of claiming deductions for the costs of selling your business can be confusing. With the right preparation, however, you can ensure that you claim the right deductions for your inventory, equipment, and buildings. A lot of small business owners don’t claim their expenses and end up losing out on a substantial amount of money. If you’re going to sell your business, you should always claim all of your expenses.
3. Deduct any capital losses from previous years against capital gains on the sale
Add up your capital losses from the previous years. This is the amount you can use to deduct from your capital gains. If the deduction is greater than your total capital gains, you can deduct the rest from your regular income.
4. Deduct part of the cost of assets for the business
On the one hand, you need to purchase assets for your business. However, you can’t immediately deduct the cost of the asset when you buy it. Write a list of all your assets and their values. This includes the cost of the building, furniture, and other equipment. Make sure you know how long you can deduct each type of asset. Assets that last more than one year can be deducted over a number of years without being completely depreciated. Also, deduct your startup costs. These are the expenses you incurred setting up or organizing your business.
5. Claim a tax-free reorganization
A tax-free reorganization is a tax strategy commonly used by companies going through financial distress. If you are a shareholder in a company that qualifies, your shares will retain the same value and payouts will be increased significantly. It’s also a great alternative for companies with no way to pay back their creditors. When a company is in a state of financial distress, it may be appropriate to move part of the company’s assets to a new holding company. The company can then reorganize to bring the new holding company above the line in terms of operational liquidity. By doing this, the company can avoid paying taxes on the transaction.
6. Claim a tax-free rollover of assets
There is a lot of money to be made from selling a business, but there are also a lot of taxes to pay. You can reduce the amount that you pay on taxes by claiming a tax-free rollover of assets from selling your business. Before you sell your business, you should claim all of your capital losses. Doing this will reduce the number of capital gains you have to pay taxes on.
7. Make tax-free gains if the business is an approved small business entity
Selling a business can be a difficult and confusing process. Keep in mind that you can make tax-free gains on the sale of an approved small business entity if you sell the business within five years of starting it. This is a great incentive for someone who is considering selling their business in the future!
8. Defer or reduce your capital gains tax
In the United States, there is a way for you to defer or reduce your capital gains tax upon selling your business. The tax rate you end up paying depends on a few things. Firstly, the cost basis is calculated two ways: the cash basis and the adjusted basis. The cash basis is the total amount of money spent by the business before it was sold. The adjusted basis is the total price of the business accounts.
Deferring capital gains taxes are a way to postpone the payment of taxes on the sale or transfer of property. If you sold your business this year, there is a way to defer or reduce your capital gains taxes. You can either reinvest your proceeds from the sale into another business or buy a new business. This way, the IRS will consider your new business as the new investment and it will be taxed as such.
9. Defer or reduce your income tax
If you’re thinking about selling your business, there are a few tax advantages to consider. First, you can delay or reduce your taxable income if you qualify under Section 338 of the Internal Revenue Code. You can also take a deduction if the selling price of your business is less than the fair market value of the assets. However, you’ll have to pay normal income tax rates on the difference between the two. It’s important to consider that, if you transfer the assets to a spouse or a corporation, you can avoid paying taxes on the difference. In order to transfer the assets to a corporation, the corporation must have been active and operating for at least five years and at least 80% of the shares must remain in your company.
Since building your business is a process that takes time and energy, you need to look at the upside of selling your business in order to do what is best for you and your family. When deciding whether or not to sell your business, there are nine financial and tax benefits to consider. If you are serious about selling your business, it is in your best interest to do thorough research on the tax advantages of selling a business. The bottom line is that selling your business could potentially save you money, and it’s important to consider all the options before making your final decision.
If you’re thinking about selling your business, Transworld Business Advisors Palm Desert can help! Whether you own a restaurant, a manufacturer, or a service company, we can assist with getting the most out of your business sale. Transworld can help you receive advice and guidance on how to sell your business and will determine the best time to do so. As a leading team of professional brokers, we have over 40 years of experience in representing businesses and providing a wide range of options for buyers.