Transferring ownership of a business can be a significant milestone, whether it involves selling to a third party, passing the business to a family member, or merging with another entity. A lawyer, such as a tax lawyer, knows that each method of transfer carries its own tax implications, and understanding these impacts is key to making informed decisions. Proper planning can help manage liabilities and preserve the value of the transaction.
Capital Gains Taxes On A Business Sale
The team at Goldman Law knows that when selling a business, the transaction is typically subject to capital gains tax. This tax applies to the difference between the sale price and your basis in the business, which generally includes your initial investment and any additional contributions or improvements.
The tax rate for capital gains depends on how long you’ve owned the business. Gains from assets held for more than a year are taxed at long-term capital gains rates, which are typically lower than rates for ordinary income. For assets held less than a year, short-term capital gains rates apply, aligning with your regular income tax bracket.
Proper allocation of the sale price to different assets—such as equipment, real estate, and intangible assets like goodwill—can also affect your tax obligations.
Tax Implications Of Gifting A Business
Transferring a business to a family member as a gift involves considerations under federal gift tax rules. The IRS allows an annual exclusion amount for gifts—$17,000 per recipient in 2023—before the transfer counts toward your lifetime gift and estate tax exemption.
For business transfers exceeding the annual exclusion, the excess reduces your lifetime exemption, which is currently over $12 million per individual. While most people won’t owe gift tax due to the high exemption, it is important to document the transfer correctly to comply with IRS requirements.
Gifting a business can also affect the recipient’s tax basis in the business. The basis typically carries over from the donor, meaning the recipient may owe more in taxes if they later sell the business at a higher value.
Succession Planning And Estate Taxes
When transferring a business as part of an estate, estate taxes may apply depending on the value of the estate and the applicable exemption amount. Federal estate taxes are imposed only on estates exceeding the exemption threshold, but some states have lower thresholds or additional inheritance taxes.
Using trusts, family limited partnerships, or other estate planning tools can help manage these taxes and facilitate a smoother transfer of the business to heirs.
Retirement Accounts And Deferred Tax Considerations
If you are retiring after the transfer, consider how the proceeds will be used. Contributions to certain retirement accounts may help defer taxes, while reinvesting in other ventures may trigger additional considerations.
Get Help Today
Transferring a business involves more than just a change in ownership; it requires careful attention to the tax implications of the transaction. Whether selling, gifting, or passing the business through an estate, understanding these issues can help reduce liabilities and protect the value of the transfer.
Our friends at Crepeau Mourges discuss the value of consulting with legal and tax professionals to ensure that business transfers are handled with foresight and care. Proper planning can make a significant difference in preserving the financial health of both the transferor and the recipient. Find legal help today.