If you are considering selling your business, tax rates, including the capital gains rate, need to be a consideration for you. To minimize your tax payment you will want to plan for the best date to complete the transaction. And before any further explanation, you will want to talk to your accountant or lawyer or both. The potential issues are way more complex than this short post.
What portion of your sale becomes subject to capital gains tax or regular income tax depends on several variables:
The legal structure of your business
What exactly is being sold?
Future tax rates
The Legal Structure
If your business is a C Corporation, then the sale of the business may be retained within the corporation without impact on your personal 1040. As long as the company does not pay a dividend back to the shareholders equal to the amount of the sale, there will be only the corporate tax rates to pay. When money is distributed it becomes personally taxable.
If your business is an S corporation, an LLC or other limited liability entity, or is a proprietorship, the proceeds of your sale will be passed on to the individual owners at the rates then in force.
What are you selling?
Are you selling the company as a whole or are you selling the assets of the company.
If you are selling your C Corporation and transferring stock ownership, the rules of capital gains for individuals apply. This is primarily how long you have owned the stock. If you are selling the assets, as is commonly the case, the corporation will report the sale with some items as capital gains and other as normal income.
If you are selling the assets of a pass through entity, a proprietorship or partnership, the proceeds from the sale are taxable on the personal returns of the owners with some assets taxed at capital gains rate and others at personal rates.
Future tax Rates
Capital Gains Tax Considerations for Selling a Business in 2012 are more favorable. Both income and capital gains tax rates are scheduled to increase in 2013. While there have been a number of proclamations from the political world that rates should not go up, basing your plan on what is in today’s law would suggest that doing it before the end of 2012 is a good idea,