During his career, David M. Daggett has been involved in the sale of many businesses. One of the aspects that clients have turned to him for advice has been in the tax implications of the sale. As an entrepreneur, you have to know that selling your business can leave you with significant tax implications. In fact, if you are not keen during the process, you can wind up with less money than you originally hoped for, after the tax obligation is met. However, with good planning, it is possible to reduce the taxes incurred.
In the sale of a business, the taxes are levied on the profits made. You might have some level of control over the terms of the deal, but the tax authority is bound to claim its fair share in due time. The amount of tax paid will depend on whether the money made from the sale is viewed as capital gains or ordinary income. The money received from selling business assets is likely to be viewed as capital gains, while any money received through a consulting agreement is ordinary income.
When you value the business in totality, you and the buyer have to agree on the value of each individual asset, whether tangible (servers) or intangible (goodwill). This allocation will help determine the amount of tax you have to pay. It will also have tax implications for the buyer. What is good for the tax implications for the buyer is often bad for the seller and vice versa, so finding common ground on the value of assets requires negotiation and compromise.
David M. Daggett, CPA has been involved in the sales of many businesses, including the sale of Gator Hawk Armor, Inc., to a Canadian public company.