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Exploring topics affecting small businesses in Texas

Tax Implications When Selling a Business

Taxes when selling a business might come confusing at first, but it's a lot easier than you think.
Tax implications when selling a business in Austin, Texas.

Taxes when selling a business can be a tricky subject, but it’s crucial to have a good understanding of them to ensure that you don’t get caught out with any unexpected bills. 

 

In this article, we’ll be discussing the ins and outs of selling a business in Texas, and the different types of taxes you need to consider. So, let’s get started!

Types of Taxes to Consider When Selling a Business in Texas

When it comes to selling a business, there are a few different types of taxes to keep in mind. 

Federal Income Tax

First up is federal income tax. This tax is based on your taxable income and can vary depending on a range of factors such as the amount of profit you make, how long you’ve owned the business, and the way you structure the sale.

 

In addition to federal income tax, you’ll also need to consider state income tax. In Texas, state income tax isn’t applicable, but there are other taxes to keep in mind, such as sales tax. The sales tax rate in Texas is currently 6.25%, but it can vary depending on the type of product or service you’re selling.

Capital Gains Tax

Capital gains tax is another tax you’ll need to think about. As the same goes for Federal Income tax, it also applies to the profit you make when you sell your business and can be impacted by the length of time you’ve owned your business, how much profit you’ve made, and the way it’s structured.

Franchise Tax

Finally, there’s the franchise tax, which is a tax paid by businesses in Texas for the privilege of operating in the state. This tax can be complex, and the amount you pay can depend on a range of factors such as the size of your business and the industry you operate in.

How Much Tax Will I Pay if I Sell My Business?

The amount of tax you’ll pay when you sell your business can vary depending on a range of factors, including the length of time you’ve owned the business, the profit you’ve made, and the way you structure the sale. It’s important to note that tax is calculated based on the gain you make, which is the difference between what you paid for your business and the sale price.

 

To calculate your tax liability, you’ll need to work out your taxable gain and then apply the relevant tax rate. For example, if you sell your business for a profit of $500,000 and your taxable gain is $300,000, you may need to pay capital gains tax of 15% on that amount.

 

You might want to check this article on how to value your business if you’re considering selling your business in Austin, Texas.

How Much is Sales Tax for a Business in Texas?

As mentioned earlier, the sales tax rate in Texas is currently 6.25%. However, this can vary depending on the type of product or service you’re selling. For example, if you sell alcohol or tobacco products, the sales tax rate may be higher.

 

If you sell taxable goods or services to customers in Texas or sell to Texas-based customers, it’s mandatory to collect both the state sales or use tax of 6.25 percent and the applicable local sales or use tax. The maximum local tax that you can charge is capped at 2 percent, which means that the total tax amount you can collect is 8.25 percent at the most.

 

It’s also worth noting that there are some exemptions to sales tax in Texas. For example, if you’re selling food or medicine, you may not need to pay sales tax. It’s important to check the Texas Comptroller website for more information on sales tax exemptions.

How is the Sale of a Small Business Taxed?

If you’re selling a small business, you’ll still need to consider the different types of taxes that apply. However, there may be some additional benefits available to you. For example, if you’ve owned your business for more than a year, you may be eligible for lower capital gains tax rates.

 

As such, if you’re selling assets like equipment or vehicles, you may need to pay tax on any gain you make from those sales.

Do You Really Have to Pay Tax on the Sale of a Business?

Yes, you will generally need to pay tax on the sale of a business. However, the amount of tax you pay will depend on the factors we’ve discussed, such as the length of time you’ve owned the business, the profit you’ve made, and the way you structure the sale.

 

It’s important to note that if you don’t pay the correct amount of tax on the sale of your business, you could face penalties and interest charges.

How Much Can You Sell Without Paying Taxes?

The amount you can sell without paying taxes will depend on a range of factors. If you’re selling your primary residence, you may be able to exclude up to $250,000 of the gain from your taxes, or up to $500,000 if you’re married and file a joint tax return.

 

However, when it comes to selling a business, the rules are a bit different. In general, there’s no set amount you can sell without paying taxes. Instead, your tax liability will depend on the gain you make, which is the difference between what you paid for your business and the sale price.

 

It’s important to seek professional advice when selling a business, as there may be ways to structure the sale to minimize your tax liability. 

 

For instance, you may be able to spread the gain over several years or offset the gain with losses from other investments.

Conclusion

Selling a business can be a complex process, and it’s essential to ask the most important questions and have a good understanding of the different types of taxes that apply. By working with a tax professional and planning ahead, you can minimize your tax liability and ensure that you don’t get caught out with any unexpected bills.

 

Remember, the amount of tax you’ll need to pay will depend on a range of factors, including the length of time you’ve owned the business, the profit you’ve made, and the way you structure the sale. 

 

If you’re considering selling your business in Texas, it’s important to have the right team on your side. 

 

Here at Tsetserra Growth Partners, we want to help avoid uncertainty by giving you a sounding board when you are asking yourself these questions about taxes. You have worked hard to get to this point, contact us to make the most out of it!

 

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