Minimize tax selling your business
How do I minimize tax I pay when I sell my business?
You have made the decision to sell your business. You have decided what you will move to once the business is sold. You have a valuation so you know what your business is worth. You’ve looked at the business with fresh eyes and have it looking good so when a buyer comes along they will like what they see. As they say in the Classics, you are all dressed up and ready to go or as I like to call it, you are seller strong. That is, you know where you are going and how you want to get there.
However, there is a final piece you need to know so you can maximize the value from selling your business and this is to understand how much tax you will have to pay. This may seem like a waste of time and money but in fact it is the opposite; and here’s why.
If you find a qualified and motivated buyer you will move into reactive mode. That is, the buyer wants to maximize the final purchase price they will negotiate so the business generates the maximum cash flow.
Conversely, your goal as the seller is to also maximize the amount of cash flow the business will generate to you personally and you will do this by minimizing the amount of tax you have to pay.
One of the documents both the buyer and seller will each have to complete prior to closing escrow is the Purchase Price Allocation or IRS Form 8594. This document reports to the IRS the value of the total purchase price broken down into different classes of assets. These different classes of assets attract different rates of tax and so ultimately affect the amount of tax the seller pays and therefore gets to keep.
To help the seller minimize the amount of tax they pay, one of the services we provide is a Tax and Structuring Analysis and Report. The title is a little long winded but it includes the following:
- Three different pricing and/or structuring scenarios and how they affect the seller.
- A clear explanation of each scenario so the seller understands the outcome of each option.
- A summary of how much tax would be paid by the business and at a personal level.
- A summary of the taxes on both the tangible and intangible assets.
- How the asset allocation should be done when completing IRS Form 8594.
- An explanation of how much the seller gets to keep from the sale after all business and personal taxes are paid.
So what’s the value and benefits of getting a Tax and Structuring Analysis and Report?
In simple terms, the buyer, almost without exception makes the first offer and their focus is on the total purchase price with the conditions that are important to them. Obviously the buyer does not know how much tax you will pay if you accept their offer so if the buyer’s offer is close to what you are willing to accept, your final counter is to say you will accept the offer as long as the buyer accepts your purchase price allocation.
If you would like some more information, please email me at Andrew@RogersonBusinessServices.com and I can explain how I can assist with a Tax and Structuring Analysis Report that is specific to your business and your situation.
If you would like to see a sample, click on the following link – Sample Tax and Structuring Report