There are many reasons why you might want to sell your business. You could have another venture in mind that requires your full attention, or you might simply want to cash-in on the increased value of your current business. Either way, selling the business is a good decision. This isn’t a simple process, though. There are lots of taxes involved that can impact the worth of the sale and how it goes forward. Here are a few ways to reduce the amount of tax you pay when selling your business.
Discounts on capital gains
When you sell part of your business, you’re also selling the assets that come with it. The sale of these capital assets can net you quite a bit, depending on how costly they were originally. The base cost of the asset can fluctuate, depending on a few factors. Should you sell the asset for more than its cost base, the excess money is what’s known as capital gain. This is taxed according to capital gains tax (CGT), as the name suggests.
- About Capital Gains Tax Considerations When Selling a Business
- How to Avoid or Reduce Capital Gain Tax
The amount you pay depends on how long the asset has been in your possession. After twelve months, the asset owner can have the tax percentage halved when selling the asset. The final number is then taxed according to the proper marginal tax rate. If the sale is being negotiated somewhere around the twelve-month mark, it would be wise to wait until this time has passed, as it would mean major savings when calculating capital gains tax.
Video: How to Avoid Capital Gains Tax when Selling a Business | Nomad Capitalist
Contract attribution for assets
Certain assets that your business possesses have values that are difficult to determine. This often goes for assets such as trading stocks and assets that depreciate quickly. To figure out the appropriate tax rate for these kinds of assets, agencies use the sales contract that was formed between the purchaser and seller.
Minimizing the value of your asset would be the best possible way to reduce your capital gains tax, but this won’t sit well with the purchaser. Should they sign such a contract, their tax situation would end up with a net loss. This makes the purchase unfavourable.
This is why it would be better to avoid any contractually attributing set values in your sales contract. In this scenario, both parties have the opportunity to attribute independent values to the assets that are being purchased. These values have to be based on reasonable estimates, but there's still some leeway given with certain assets. This minimizes losses for both parties, giving them more incentive to go through with the deal.
Separate leave transfer payments
Employees will often have different amounts of annual leave leftover after the fiscal year. It's not uncommon for a lot of it to remain unused during the process of selling a business. In these scenarios, it's the duty of the seller to compensate the employee or provide funds to the buyer so that they don't have to.
Unpaid leave liabilities can be adjusted against the overall price of the business and used to reduce the CGT that you pay. On the other hand, you can also pay the new owner for the entitlements and claim a tax deduction on the payment. The savings that come from the latter option are going to be much greater than the reduced price of the business, which is why it’s the preferred option during a sale.
Related: How to Price a Business
Keep in mind, this situation is only applicable if your sale meets certain conditions. The entity buying the business has to be required to make these payments to their new employees under liability law. If the new owners aren’t liable for the payments, they might not qualify for accrued leave transfer payments.
Passing on forward tax losses
During your ownership of the business, it’s likely that you’ve incurred at least some tax losses. This can be advantageous while selling the business, as it can allow you to increase the price to create a suitable balance. However, your ability to transfer these tax losses depends on a few factors.
Tax losses are often attached to a particular trading entity. For the purchaser to be able to take advantage of these losses, they have to be in ownership of the trading entity itself, alongside the business. Loss recoupment rules for the specific entity must be followed to allow the purchaser access to these tax losses during the purchase.
Selling interest in the entity is another attractive option for both the seller and purchaser. Transferring shares of a trading company without selling the business out of the trading entity allows you to access certain concessions. The aforementioned 50% capital gains tax discount can be utilized for these shares as well. If the tax concessions don’t provide enough of a discount, reducing the overall price is another viable option that can lead to significant expense reduction.
For any given business, there are countless assets that have been heavily invested in that have to be transferred during a sale. Everything from the physical location of offices to the website needs to be accounted for and calculated for potential deductions. Websites, in particular, are especially important for many businesses that partake in eCommerce.
Businesses often utilize seo experts to optimize their websites for maximum exposure and efficacy. For this reason, there are aspects of website design and optimization that are tax-deductible. However, claiming deductions requires that you make an analysis of the costs and circumstances of the website upgrades.
The costs associated with a website can be classified as capital expenses or ongoing running costs. You’ll have to determine which upgrades fall under which umbrella and how they are taxed individually. Under special provisions, you can even deduct website work that was done before the business has officially opened. This is because having a functional website is essential for many businesses going in.
If you wish to transfer your business to a relative or close friend, it’s important to know the tax implications of such a change. While not exactly a sale, it’s still a transfer of assets and liabilities that needs to be analyzed from a tax perspective. A highly appreciating asset such as a business is a good investment for an individual’s financial future.
Minimizing the impact of taxes on the transaction is crucial for this process. The best way to do this is to freeze the value of the business in its current valuation. Transferring the business then comes with a few additional benefits. While the assets are frozen, they’re still appreciating in value over time. Once the business has accumulated enough appreciation, the person you’ve transferred it to may sell it and reap the benefits. This way, gift and inheritance tax on the appreciation are avoided, and the additional value goes to them. It’s a very thoughtful way to secure someone’s finances in the long run.
Selling or transferring a business is no small task. There are many tax implications that will reduce the amount of money you gain from the sale, while also making it a bit more difficult to find an appropriate buyer. Before completing the sale, it’s important to know the many different ways you can lessen the impact of taxes on the transaction. Apply some of the above-mentioned tactics and you’ll get the most out of selling your business.
More on the topic: Tax Considerations When Selling a Business