There are several strategies to reduce capital gains when selling a business in San Diego or anywhere in California. This will require important steps to be taken prior to the completion of the transaction, as well as implications based upon the application of the proceeds. The structure of the transaction itself can have substantial impact on the capital gains taxes that may result.
Generally speaking, capital gains are incurred when you sell an asset for more than its present tax basis. The good news in this conversation is long term capital gains are taxed at a much lower rate than short-term capital gains. Why does this matter? Different assets are actually taxed at different rates. For example, generally speaking the sale of accounts receivable and existing inventory in smaller businesses is usually taxed as ordinary income. There are many assets and aspects which make up any business or corporation. The selling contract should precisely allocate the purchase price of your company to reduce capital gains when selling a San Diego business.
A stock purchase agreement is considered to be a long-term capital gain (if the company has been owned for more than a year). However, most buyers are very concerned about the contingent liabilities associated with a stock purchase. Extensive due diligence is a key to these transactions. Many buyers prefer an asset purchase contract which will require you to work with a partner who integrates sound legal, accounting and tax expertise.
C Corporations may consider the implementation of an ESOP plan, with the intention of taking advantage of the IRS 1042 rollover instructions. If the ownership of a C Corporation is active, another option is to convert the business to an S Corporation to avoid the Medicare surtax (just under 4%). Small business sales are taxed at a different rate, and it may be possible to separate sections of your company into new businesses that could be spun off as “small businesses” prior to sale.
Allen Barron is uniquely positioned to guide you through the process of a merger, acquisition or the sale of your company in order to reduce capital gains when selling a San Diego business. Our tax attorneys and accountants provide insight, counsel and profitable guidance on how to structure the transaction to reduce associated taxation and position you to retain as much of the proceeds as possible. Our integrated business expertise, accounting services, legal and tax services under a single source provides the strongest resource for you as you prepare for the sale, during the transaction and in the months and years to come. If you are considering the sale of a San Diego business we invite you to contact us or call today to schedule a free consultation at 866-631-3470.