Quick Summary: Tax Traps to Avoid When Selling Your Yamhill County Business
- Depreciation recapture can cost you up to 37 percent in taxes.
- Deal structure (asset vs. stock sale) changes your tax outcome.
- Mismatched IRS Form 8594 filings can trigger an audit.
- Proactive planning means more money in your pocket.
Don’t let the IRS ruin your business exit. Here’s what every McMinnville business owner needs to know before selling their company.
If you’re planning on selling your business, chances are you’re envisioning the freedom and financial reward that comes next. Maybe you’ve built something from scratch and now you’re ready to move into a new season — or finally take that long-overdue vacation.
But before you celebrate, there’s one thing you shouldn’t ignore: the massive tax bill that could be waiting for you after the sale.
Nothing spoils a great deal like discovering too late that a large chunk of your profit is owed to the IRS. Unfortunately, this happens to business owners all the time — not because they did anything wrong, but because they didn’t plan ahead.
Let’s break down the most common tax traps business owners face when selling their company — and how you can avoid them.
The Silent Profit Stealer When Selling Your Business
The first thing you’ll need to look out for is depreciation recapture. This has to do with past tax savings you’ve enjoyed. For instance, let’s say you sold your landscaping business for 400K. Over the years, you wrote off 100K in depreciation on your trucks and equipment. Good move at the time.
But here’s the catch: when you sell, that 100K comes back as ordinary income, not the lower capital gains rate. Depending on your tax bracket, you could pay up to 37 percent on that portion.
And if you’ve got an existing tax payment plan, or you miss an estimated payment in the process, you could trigger penalties and even lose the benefits of your current plan.
Asset Sale vs. Stock Sale: Why Structure Matters
How you structure the sale of your business has a big impact on your tax bill.
1. Asset Sale: Roughly 70 percent of small business transactions are structured this way… especially for sole proprietors and LLCs. It’s often preferred by buyers, but can be a big disadvantage for sellers. Asset sales:
- Trigger depreciation recapture
- May result in some gains being taxed at higher ordinary income rates
2. Stock Sale: More common for corporations, this structure typically results in your gains being taxed at the lower capital gains rate. But there’s a tradeoff: buyers inherit the company’s liabilities, making them more cautious.
That means you’ll need to negotiate wisely and consider your tax exposure when choosing the structure.
Don’t Wait: Tax Planning Must Come Before Selling Your Business
Too many business owners think about taxes after the sale… when it’s too late to fix anything.
Here’s how you can take proactive steps now:
Tax-Efficient Deal Structuring
The way you and the buyer allocate the purchase price (inventory, equipment, goodwill) determines how each portion is taxed. You’ll both need to file IRS Form 8594, and it better match. Mismatched forms are an audit magnet.
Installment Sales
Taking the money all at once can bump you into a higher tax bracket. An installment sale spreads the income over several years, reducing the annual tax burden and helping you manage any existing IRS debt.
Net Investment Income Tax (NIIT)
If your income is above 200K (single) or 250K (married filing jointly), you could face a 3.8 percent NIIT on top of other taxes. Many sellers are blindsided by this one.
FAQs: Tax Considerations When Selling a Business
What’s the biggest tax mistake business owners make when selling their business?
Failing to plan for depreciation recapture and choosing the wrong deal structure — both can lead to surprise IRS bills.
How can I reduce taxes when selling my business?
We can work together to consider installment sales, proper asset allocation, and stock sale advantages. These strategies can significantly reduce your tax hit.
Is selling a business taxed as income or capital gains?
It depends. Some portions (like equipment depreciation) may be taxed as ordinary income, while others (like goodwill or stock sales) may qualify for long-term capital gains treatment.
What IRS forms do I need when selling my business?
IRS Form 8594 is required when allocating the purchase price of business assets. Both seller and buyer must file matching versions.
Can I sell my business and stay on as a consultant?
Yes, and this can be a smart way to spread income and reduce tax spikes — but it needs to be structured carefully.
Will I owe Net Investment Income Tax?
If your MAGI exceeds $200K (single) or $250K (married filing jointly), you may be subject to NIIT on part of your gain.
Selling Your Business Should Be a Victory Lap
With the right strategy and your favorite McMinnville advisor (wink, wink), you can reduce your tax burden, avoid audit triggers, and keep your cash flow positive
Let’s talk before you sign anything. The sooner you plan, the more you keep.
