How Much Will I Owe in Taxes For the Sale of My Business?

For many business owners and entrepreneurs, selling their business is a significant validation because it means that they have grown a business to the point where someone is willing to pay for it. 

According to some business brokers, without proper planning, there is a considerable risk of mishandling the selling transaction, which could be problematic regarding taxes. Here is everything you should know about taxes when it comes to selling your business.

What Taxes Apply When Selling My Business?

While the sale of your business triggers a long-term capital gain, federal capital gains taxes will apply. For most of the United States’ history, capital gains were taxed more advantageously than ordinary income. According to the Tax Cuts and Jobs Act of 2017, the rates break down to this:

• 0% for those with taxable income under $40,000, married filing separately under $40,000, married filing jointly under $80,000, and head of household under $56,000
• 15% for those with taxable income ranging between $40,000 and $441,450, married filing separately at intervals of $40,000 and $248,300, married and filing together between $80,000 and $496,600, and household’s head ranging between $53,600 and $496,050.
• 20% for persons with taxable income over $441,450, married filing separately more than $248,300, married filing above $496,600, and head of household above $496,050.

For example, suppose you started a business 20 years ago with an initial investment of $100,000, and you’re selling it today for $10 million. In that case, your long-term capital gain is worth $9.9 million (the selling price minus the original cost). As such, a federal capital gains tax of 20 percent would apply, reducing your net proceeds from the business sale to just over $8 million. 

However, if you have owned your company for less than a year before deciding to sell it, the selling proceeds will be taxed at the ordinary income tax rate.

Type of Business: What it Means for Taxes?

Federal tax rules differ based on your business type, and capital gains rates vary. For a C corporation sale, the profits made will be taxed twice. The first is a commercial tax filed on a corporate tax return, and the second is on each shareholder’s and owner’s income tax. Corporations are considered entities, meaning any profit made on the sale must be paid as capital gains in the annual filling. 

For partnerships and S corporations, the profits made from sales will be taxed once as a capital gain on every shareholder’s personal income tax. The profits are generally split amongst shareholders, and everyone is responsible for reporting their share of earnings on their taxes.

As for sales proprietors and limited liability companies, they will have to pay taxes on their business sale once. The sale will be taxed as a one-time capital gain and paid on their personal income tax form. However, the assets sold with the ownership of the business will be taxed separately as income. When you start planning to sell your business, you may find it a complex task, but having the right financial help by your side make the process go more smoothly.