The tax consequences of selling a business depend on whether you operate as a sole proprietor or a corporation. As a sole proprietor, selling your business means you are selling the individual assets of the business. The sale of a business is not usually a sale of one asset. Instead, some or all of the business’s assets are sold. When this occurs, each asset is treated as being sold separately for determining the treatment of gain or loss.
If you are incorporated, you can either sell your stock to another individual, or the corporation can sell the assets. If the assets are sold, the corporation pays the tax on any gain. You, as a shareholder of the corporation, do not have a tax consequence unless the corporation liquidates and distributes the proceeds of the sale to you in exchange for your stock.
In any case, if you sell your business, you may need to complete additional tax forms with your annual tax return. When sold, these assets must be classified as capital assets, depreciable property used in the business, real property used in the business, or property held for sale to customers, such as inventory. The sale of capital assets results in capital gain or loss. The sale of inventory results in ordinary income or loss.
It’s important to determine what the potential tax consequences are prior to signing the sales contract. If you want to defer the gain on the sale, an installment agreement might be an option. Let us help you understand your options so we can discuss the tax consequences before you sell.