Selling your business? One of the many important considerations is the potential tax consequences of the transaction. Learn how an installment sale might, or might not, save you tax.
Whether you’re selling your business or acquiring another company, the tax consequences can have a major impact on the transaction’s impact on your personal net worth.
Installment sales offer sellers both tax pluses and tax minuses. On the plus side, the seller can spread gain over several years, which is especially beneficial if it allows the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate. But an installment sale can backfire if there’s depreciation recapture because the seller must report it as gain in the year of sale, no matter how much cash the seller receives. Or, if tax rates increase, the overall tax could wind up being more.
Let’s consider the pros and cons.
The sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. And it sometimes — but not always — can offer the seller tax advantages.
An installment sale may make sense if the seller wishes to spread the gain over a number of years. This could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.
For 2016, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2016 taxable income exceeds $415,050 for singles, $441,000 for heads of households and $466,950 for joint filers (half that for separate filers).
But an installment sale can backfire on the seller. For example:
- Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.
- If tax rates increase, the overall tax could wind up being more.
Please let us know if you’d like more information on installment sales or other aspects of tax planning.
Remember that you don’t have to fight this IRS battle alone. You can use the link below to contact us with questions.
He is also a founding Board Member and Finance Director of the Fayette Pregnancy Resource Center and serves on the Board of the National Equal Rights Institute.