Tax Consequences of Selling a Business

Maybe you're ready to retire, pass your business on to your children, and live out your days on a Caribbean beach. (Nice choice.) Or maybe you're so far in the black that the time is simply ripe for

Regardless of the legal form of business, there are two tax considerations for all sellers. First is how income is taxed — as personal income or capital gains. With long-term federal capital gains rates currently hovering around 20 percent and top personal income rates over 30 percent, this can be an important factor. The other consideration is when income is earned (and taxable). There are methods for structuring payments that can help the buyer and seller work out a mutually agreeable payment structure for tax purposes.

If your company is set up as a sole proprietorship or partnership, you'll be selling the company's assets. 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 — which results in capital gain or loss. Inventory sale results in ordinary income or loss. All income from the sale of your business will flow through into your personal tax return in a similar fashion as it does now.