Tax Benefits Of Business Installment Sale – Missouri Tax Accountant
When selling a business, it’s important that the seller consider many different factors. The value of the business is usually the main focus during negotiations, but it’s also important to consider how the business is sold and the potential tax implications. At the end of the day, the amount of money you are able to keep is the true number that really matters.
Selling a business for a lump sum has definite advantages. It’s cleaner and more straightforward with less potential risk. But to fully analyze the pros and cons you’ll also need to consider the tax implications with your Missouri tax accountant.
The basic tax rules for a lump sum payment are straightforward. A single payment from the sale of an interest in a business will cause any capital gain or loss on that sale to be recognized in a single tax year. There are potential tax consequences of this scenario.
A large capital gain in a single tax year could potentially cause the seller’s tax bracket to shoot up and generate a higher tax rate per dollar of gain. Conversely, if the sale is a capital loss, it could generate more losses than can be taken in a single year, leaving a potential loss carry-forward when preparing your business taxes.
Under the installment sale method, taxable gains are spread out over multiple years. Capital gain is calculated once and is expressed as a gross profit percentage. This percentage is then applied to each payment as it is received. Capital gains are included in income in each year for which the seller receives a payment from the buyer. In addition, the buyer pays interest to compensate the seller for waiting to receive payment.
An installment sale will usually open up the business sale to more potential buyers who would have difficulty financing the lump sum payment, but you do run the risk of the buyer defaulting. In this case you can never be sure of what condition the business will be in if you have to take possession again. Also future tax rates on the sale can fluctuate over time.
Tax implications should not be the only factor that is considered when deciding between a lump sum buyout or installment sale. The security of the buyer, the stability of the business and the rate of return on investing the proceeds are all part of the equation.
If you are considering selling your business and would like help analyzing the tax implications of a lump sum buyout compared to an installment sale, consult your Missouri tax accountant at Schultz, Wood & Rapp.