Lower The Tax On The Sale Of Your Business

There are many reasons for selling a small business. Whether you’re cashing in on a successful franchise location, cutting your losses from a less-than-satisfactory venture or building up capital for the next big project, you’ve decided it’s time to move on. Now, one of the biggest hurdles you face is determining how to minimize the tax on the sale of your business.

Here’s where one of the major challenges arises: businesses are often tightly interwoven with their owners’ personal lives. This complicates things. And it doesn’t exactly make the IRS happy. Consequently, there are numerous hoops to jump through to ensure you are paying the proper amount of taxes when it comes time to sell your business. Property and other assets must be made clearly distinguishable—are they for personal or business use?

The typical example is the home office. For many entrepreneurs, this is their primary place of business. Others maintain a home office in addition to their more public business location, enabling them to stay on top of the ball without needing to burn the midnight oil downtown.

Meetings with clients or partners, some bookkeeping, and other operations can often be done quite easily from home, making this an attractive option. As far as your taxes go, however, the results are a mixed bag. Indeed, there are some deductions that can be made—such as for utility bills or office equipment—that will help with reducing the gain from selling your business, and thereby reduce the tax on the sale of your business. Unfortunately, if you go so far as to claim depreciation, then you this could backfire by lowering the total value of your home.

This principle extends throughout most split-use properties, with the additional wrinkle of the IRS actually considering the sale as being of two values—with gains or losses being calculated independently for each portion. The same goes for properties wholly converted from one use to another, such as a large family home converted to a bed and breakfast and then sold. In that instance, two different functions will be applied for the relevant periods of time.

While considering the pros and cons of various options for business gain deductions, it might be worthwhile looking into a bargain or charity sale as a means to reduce your gain—and therefore your entire tax liability. Your basis in a property is, in most circumstances, simply the price you paid for the property. The IRS uses an adjusted basis to calculate the value of your gain in the instance of charitable sales.

Here it gets a little complex, but it’s worth spelling out: to calculate your adjusted basis the IRS divides the sale price by the market value and multiplies that figure by your original basis. This adjusted basis is then subtracted from the actual sale price to provide a figure for your gain. Therefore, the lower the sale price, the lower your gain.

As you can tell, claiming tax deductions on the sale of your small business can be a tricky process. Is it really wise to claim all the deductions? Does it make sense to sell for less than the market value? Without a doubt, the best option for you is to consult a certified business tax professional. It’s important to remember that selling your business will leave a big footprint in the makeup of your finances, so it’s best to take the sale slowly and not make assumptions regarding the tax on the sale of your business.