There’s always a nervous excitement that precedes the question, “Should I sell my business online?”. There is a wave of emotions that accompanies this thought. While it may be difficult to let go of something that you have built with love and affection, the expectation of a lucrative return on your investment is always an exciting prospect. If you have decided in the affirmative and are ready to sell your business online, then you must do holistic due diligence to thoroughly understand all aspects involved in the process.
Selling your business online can be an overwhelming and complex process, especially when it comes to taxes. Let us take a look at some of the most important tax considerations to keep in mind when selling your business online.
- Capital gains tax: One of the most significant tax implications of selling a business is the capital gains tax which is levied on the profit you make from the sale. The capital gains tax rate depends on the length of time you have held the business, the type of asset sold, and your tax bracket.
- If you have held the business for less than a year (since its registration), the gains will be treated as short-term capital gains, and the tax rate will be based on your regular income tax rate, which can range from 10% (lowest slab) to 37% (the highest slab).
- For businesses that are held for more than a year, the gains will be treated as long-term capital gains, and the tax rate will depend on your taxable income. There are three slabs here, 0%, 15%, or 20% of the profit. For example, if you are a single filer with a taxable income of up to $41,675, you will incur 0% long-term capital gains tax. However, if your taxable income falls between $41,675 to $459,750, the tax rate will be 15%. If your taxable income is over $1 million, then you will be subject to a tax rate of 20%.
- State taxes: In addition to federal taxes, you may also be subject to state taxes when you sell my business online. The tax rates and rules vary by state, so it is important to consult with a tax professional who is familiar with the laws in your state. For example, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are some of the states that do not levy a state income tax.
- Double taxation: Instead of selling your business online, in its entirety, you also have the option to sell a stake in your business as shares. In such a case, you may be subject to double taxation, as both the company and the shareholder will be taxed on the same profits. This can be avoided by selling the assets of the business instead of the shares. Here, too, you can benefit from the services of a tax consultant and a company chartered accountant to identify the tax implications and optimal route.
- Qualified small business stock: There is a special category defined by the Internal Revenue Code (IRC) known as qualified small business stock (QSBS). If you are selling QSB stocks then you may be eligible for a special tax break. The Section 1202 exclusion allows you to exclude up to 100% of the gain from the sale of QSBS, subject to certain limitations.
- Depreciation recapture tax: Have you claimed depreciation on your business assets in the financial year? If yes, you may be subject to depreciation recapture tax which is designed to recapture some of the tax benefits you received from claiming depreciation. Typically, it is levied at 25% of the benefits claimed.
- Employment taxes: When you sell my business online, you will also need to consider your employees and if you’re obliged to pay any severance package to them. If yes, you may also need to pay employment taxes on the amount disbursed to them.
In Summation
As you can see, there are several tax implications that need to be considered before the online sale of business. It is important to plan your tax strategy well in advance of the sale, to ensure that you minimize your tax liabilities and maximize your profits. This may involve structuring the sale in a way that takes advantage of certain tax breaks, such as the Section 1202 exclusion for small business stock. It is advisable to consult a qualified tax professional to ensure that you adhere to all the rules and regulations to avoid any penalties or other ramifications of non-compliance.
Here’s more on how you can sell your business online easily and profitably.