If you're in the beginning stages of selling your business, you're likely hoping to get the highest possible sales price for your assets and community goodwill. But often, the number that truly matters isn't the sales price, but the money you get to keep. By planning this transaction carefully, you can minimize federal and state capital gains taxes and keep more money in your pocket. Learn more about minimizing taxes during the sale of a business here. 

Capital Gains Taxes on Business Sales

Capital gains taxes kick in whenever a taxpayer realizes a large sum of money from the sale of an asset—a house or property, a business, or a large stock portfolio. Currently, short-term capital gains (or the sale of assets that were held for less than a year) are taxed at 37 percent, while long-term capital gains are taxed at 20 percent. States may assess additional capital gains taxes on business sales.

Because capital gains taxes can take such a sizable bite out of business sale profits, many business owners opt for an installment sale so that there is no single lump sum to tax.

How Does An Installment Sale Work?

An installment sale agreement is essentially a "rent to own" agreement you make with your business's purchaser. In many cases, this can defer capital gains taxes for years in the future (when the tax rate may be lower) and ensure that any gains that are realized are taxed at the regular income rate. Because you can modify the amount you "take" under the agreement each year, you can remain in a lower income bracket, further reducing your taxes paid.

But installment sales aren't always the answer for every business. Because they won't vest in the purchaser until after the sale is final, there's always a risk of default—and taking legal action to void the purchase can be time-consuming and expensive. In the meantime, if your buyer defaults, you'll also be losing out on the income from the sale of your business.

For these reasons, it's important to have an experienced business attorney and tax planner on your side during the sale. These professionals can work to evaluate the health of the transaction and ensure that your interests are protected at each stage. The cost of these services can be dwarfed by the value they add, both in streamlining the transaction and shielding your profits from capital gains taxes.  

To learn more about selling businesses and how to avoid taxes, contact a resource near you

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