Tax Strategies for Selling AssetsPublished:
If you are in a position to sell your business, you have two main types of sales to choose from. You can initiate an entity sale, in which the same entity continues to own all assets of the business, including accounts, inventory and property, only ownership of the entity transfers from you to the buyer. Or you can go with an asset sale instead, in which the buyer only purchases the assets of the company and you continue to own the majority of the stock, meaning that it is still technically your company. As you might imagine, the type of sale you choose has implications in terms of tax strategy.
Choosing an entity sale will most likely be a better tax strategy for you, the seller. That is because any profit you make from the sale will be taxed as a capital gain. Currently, the capital gains tax rate is at a 70-year low of 15%. Though it will revert to 20% at the beginning of 2011, 2010 capital gains will still be taxed at 15%. Profits from an asset sale, on the other hand, will be more likely to be taxed as income, and although there are certainly tax strategies that can be utilized to decrease income on your return, there is a much higher ceiling on the income tax than on the capital gains tax.
However, if you do take part in an asset sale, there are additional tax strategies you can pursue. Build your extra tax liability into the selling price for the company’s assets, or exclude the company’s real estate from the sale, so that you can rent out that real estate to a separate buyer.
Buyers of a company’s assets need to be aware of applicable tax strategies and pitfalls as well. For instance, there may be sales tax on the assets. And if the assets have depreciated, the IRS will utilize the tax strategy of depreciation recapture, and charge income tax to the seller. This is because, presumably, the seller had been using these depreciated assets to lower his or her income statement, and the IRS does not want you to deploy the tax strategy of making a profit out of a loss.
Finally, keep in mind that when you sell a C corporation, and the profits from the sale are distributed, the corporation’s shareholders will have to pay capital gains taxes. Think about how your business and tax strategies will impact your shareholders before closing the deal.