If you’re selling your business, you’re working overtime to consider every possible detail of the sale. Whether your business is selling on Amazon FBA or direct-to-consumer, there’s much to consider after the sale, too: like taxes. Have you done your research?
This article will take you through the most important information about taxes when selling your business. When you’re done reading, you’ll know what you don’t know about filing taxes before signing any agreements.
Disclaimer: This article should not be considered tax advice, legal advice, or a tax opinion. Intrinsic recommends that all business owners work with a tax advisor when considering a sale.
Why Do I Pay Taxes on a Business Sale?
This question may seem to have an obvious answer, but there’s a very important point. The tax you pay on a business sale is based on the profit you make. The actual calculations also weigh a number of other factors, besides just the straight cash flow, including:
- Your company type
- The assets you’re selling
- The structure of the sale
- What you do with the proceeds
The IRS considers these factors to determine how to collect sales taxes, income taxes, or other types of taxes. Before we go further, there are two distinct income types that individual sellers must understand: ordinary income or capital gains.
Ordinary income vs. capital gains
The difference between these two types of tax modes can be huge. Ordinary income tax is the individual tax rate you pay on various types of income you bring in - like a salary or consulting fees. Currently, the top individual federal income tax rate is 37% and could go up at any time.
Capital gains tax is a tax on the sale of an asset you’ve held for more than 12 months. Often called long-term capital gains, the maximum tax rate for most taxpayers is less than half the top tax bracket for individuals - a much more attractive 15%.
What makes this more complicated, however, is that your business is not always a single asset. Rather, the government may consider each asset that you own as part of your business separately. Understanding how your assets figure into your business sale starts by looking at your business entity type.
Company Type Can Affect Your Taxes
The complexities and structures available to you when you sell your business will partly depend on your company’s type. How you’re incorporated makes a big difference to how you can structure a sale to a potential buyer.
Partnership, or an LLC taxed as a partnership
Partners or owners of LLCs can sell their interests in a business, but the government will treat the sale as a sale of the individual assets. That means it will result in tax liability that is a combination of ordinary income and capital gains.
You may be able to structure the sale of your S-Corp business as either the sale of assets, or as a stock sale. If you sell the assets of your business, similar to a partnership, you will be taxed on a combination of ordinary and capital gains. The specific outcome will be based on how you allocate the purchase price of the business among the assets. If you instead sell the business as a stock sale, the gain will be capital gain.
If you’re selling a C-corp, you need to understand the risk of double taxation, so that you can avoid it if possible. Double taxation can happen if you sell your C-Corporation as a collection of assets.
In this case, the business first has to pay corporate tax on any gains from the sale. Then you, as a shareholder, have to pay tax as well when you liquidate the company. This is the type of sale structure that can cause you to pay more than half of the price of your business sale in taxes - and a reason to ensure you get professional advice.
If you instead handle the sale as a stock sale, there is no double taxation. Instead, the buyer purchases the company’s stock directly from the shareholders. Your profits will be taxed as capital gains at that tax rate.
Though it may seem obvious that you should structure the sale of your business as a stock sale, keep in mind that your buyer will have interests to protect in this transaction as well, and may not want to purchase stock.
But whether you’re selling stocks or every asset in your business separately, what you’re selling has a huge impact on your taxes. Be sure to talk to a business broker, tax advisor, or another professional.
Need help talking through your strategy? Consult with Intrinsic to learn more about the types of experts you’ll need to engage.
Company Assets Can Affect Your Taxes
As we mentioned previously, your business is made up of a lot of things - your name, your products, your equipment, and much more. If you’re an Amazon FBA seller, maybe the list even includes your 5-star ratings and positive reviews. These things are your assets.
The IRS recognizes your assets as individual parts of your business, and during a business sale, the IRS generally treats the transaction as selling each asset separately. This matters, because each asset has its own value, called the tax basis.
What is Tax Basis?
Each individual asset - whether it’s a building you own, your inventory, machinery, or something else - has a value. And the value may increase or decrease over time. Machinery may age, and lose value over time. Or if you own a building, you may make improvements to increase its value. And when you sell one of those assets, the government considers the cost of the asset at that moment in time. That’s the tax basis.
If you sell the asset for more money than the asset’s tax basis, you’ve realized a gain and will owe taxes. If you sell it for less, you realize a loss, and may offset other taxes due.
Different Assets Can Be Taxed Differently
When you sell your Amazon business, you’ll have to categorize each asset appropriately. These classifications include:
- Capital assets: These assets will result in a capital gain or loss, and be taxed using the capital gains rate.
- Depreciable property used in the business: Business property that has a determinable useful life, that is held for one year or more, and taxed using the capital gains rate.
- Real property used in the business: Land that is held for one year or more, and taxed using the capital gains rate.
- Property held for sale: Assets like your product inventory that you sell to customers, and taxed using your ordinary income tax rate.
Asset Allocation Matters
As we covered previously, the capital gains tax rate is usually more favorable. So, you’ll likely want to allocate as much of the purchase price of your business to capital assets (unless a qualified advisor has told you differently).
When you structure your financial statements in this way, you tell the IRS that more of the purchase price should be taxed as capital gains. With more capital gains and less ordinary income, you’ll probably pay less in taxes after the sale of your business.
However, since it’s possible that your buyer will want to allocate the purchase differently, it’s important to get professional guidance. Having a fiduciary advisor during the sale of your Amazon business will ensure you understand your options and are able to negotiate a sale that works well for all involved.
How You Structure Your Business Sale Can Affect Your Taxes
When you sell your Amazon business, you may realize that nearly everything can be negotiated with your buyer. Besides the type of transaction, you may consider whether you want to do an all-cash sale or an installment sale.
If you sell your business and expect payment to be made at the time of the transaction, you’ll complete the sale upfront and you’ll incur all of your tax liability that year.
However, you can choose to negotiate an installment sale. This means:
- The buyer will pay you over a period of time, in installments. This flexibility could mean they are willing to accept a higher sale price.
- You incur only a tax liability of what you receive in any given year.
- You may be able to charge interest.
- There is an inherent risk that the buyer could default on the payments.
An installment structure could be a great option for the sale of your business, but it’s complex enough that you should seek a tax advisor’s guidance before agreeing to it.
Your Actions Post-Sale Can Affect Your Taxes
It’s interesting to note that you can still impact your tax liability even after completing the sale of your business. If you are open to investing your gains in return for deferring or possibly eliminating some tax liability, you can consider a Qualified Opportunity Zone (QOZ).
Within 180 days of the sale of your business, you can invest some or all of your gains in a QOZ, which is an economically-distressed community. If you keep the investment for 5 years, 10% of your gain will be tax-free. After 7 years, that increases to a total of 15% of your gain. And if you keep it for 10 years, all of your invested gain is excluded from taxation.
Like many of the impacts discussed here, investing in a QOZ requires thought and deserves an expert’s guidance before you decide.
State Taxes Are Also a Factor
One final area that you have to consider in your tax planning is your state. Be sure you consider whether your state collects income tax, or corporate tax. Florida, for example, is known as one of the states with no income tax. However, it does have a corporate tax.
But because your state of residence can make an impact on your tax liability, it’s another reason to begin planning and researching the sale of your business early. You may discover that moving states is financially worth doing - but if it is, that could take time - to make the move, and perform the necessary legal steps to qualify as a resident of your new state.
Interested in Selling Your Amazon Business?
Here’s How to Start.
Intrinsic is here to help you take your next step towards selling your Amazon business. We are experts in building Amazon health and wellness brands and helping them grow.
If you’re ready to get the details about your brand and its value, start by getting a business valuation. We can talk through your specific situation, and guide you transparently about the right next steps for you.
If you’re interested but need more time, schedule a consultation with our experts. We can help you navigate the next months - or years - with target milestones in mind. During your free consultation, we’ll discuss your vision and your goals, as well as the concrete steps you can take in the coming months to increase your consumer health brand value.
We’ll also advise you to consult with a tax professional as well as legal advice to discuss all of the topics we’ve covered in this article, as well as your specific and unique situation.
Regardless of your mindset today, it’s always a great choice to think about the future. Get started on your next chapter by connecting with Intrinsic.