Selling a business can be a complex process, and understanding the tax implications of the sale is important for business owners. One critical aspect of selling a business is ensuring IRS compliance. In this blog post, we will discuss what business owners need to know about IRS compliance when selling their business.

Capital Gains Tax

When a business is sold, the sale generates a capital gain, which is the difference between the sale price and the original purchase price of the business. Capital gains are subject to taxation by the IRS. The tax rate for capital gains depends on how long the asset was held before it was sold. Business owners who sell their business must report the capital gains on their tax return for the year in which the sale occurred. They must also pay any taxes owed on the capital gains. To ensure compliance with IRS regulations, consulting with a tax professional is important to determine the amount of taxes owed and the proper way to report the sale on the tax return.

Form 8594

One critical form that business owners must complete when selling a business is Form 8594, Asset Acquisition Statement. This form is used to report the allocation of the purchase price among the various assets of the business. This allocation is important because it determines the tax treatment of the sale. For example, if a portion of the purchase price is allocated to equipment, that portion may be subject to depreciation and could be deducted from the business’s taxable income over time. Conversely, if a portion of the purchase price is allocated to goodwill, that portion may be subject to capital gains taxes. Ensuring that Form 8594 is completed accurately and filed with the IRS in a timely manner is important. Failure to do so could result in penalties and interest.

Estimated Taxes

When a business is sold, the owner may be required to make estimated tax payments to the IRS. Estimated tax payments are payments made throughout the year to cover the taxpayer’s tax liability. Business owners who sell their business may be required to make estimated tax payments if the sale generates a significant amount of capital gains. To avoid penalties and interest, business owners should consult with a tax professional to determine if estimated tax payments are required and the amount of those payments.

State Taxes

In addition to federal taxes, business owners who sell their business may also be subject to state taxes. Each state has its own tax laws, so consulting with a tax professional is important to determine the tax implications of the sale in the specific state where the business is located. Some states have a separate tax on the sale of a business, known as a state exit tax. This tax is in addition to any federal capital gains taxes owed.

Keeping Records

To ensure IRS compliance when selling a business, keeping accurate records of all financial transactions related to the sale is important. This includes records of the purchase price, allocation of the purchase price, and any expenses incurred during the sale process. Business owners should keep these records for at least three years after the sale to ensure that they can provide documentation if the IRS requests it. In conclusion, ensuring IRS compliance is an important aspect of selling a business. Business owners must be aware of the tax implications of the sale, including capital gains taxes, Form 8594, estimated taxes, state taxes, and record keeping. To ensure compliance with IRS regulations, consulting with a tax professional throughout the sale process is important. Schedule a consultation with a Private Corporate business lawyer today to review your IRS compliance while selling your business. This can help business owners avoid penalties and interest and ensure a smooth and successful sale of their business.

If you are interested in more information or if you would like assistance , please contact info@pcc.law.

Selling Your

Business

If you are interested in selling your business, you are in the right place.

Selling your business requires careful planning and execution. Before you sell your business there are many issues to consider. These issues can occur during the listing, LOI, purchase agreement, pre-closing, and closing stage of the process.

Here are a few of the important issues Sellers should consider when selling their business:

Get Important Advice

First, you must get the right counsel to help you on this journey. Private Corporate Counsel business lawyers have the legal and business education, training, and experience to help you. They also have practical experience representing businesses in many sectors, and operating businesses themselves, giving them added insight on what entrepreneurs often tackle when they are considering selling their business. Your Private Corporate Counsel (“PCC”) can help you in many ways, including:

Important Advice Before Selling Your Business

Help You Analyze Your Exit Options
Help You Understand How Businesses are Valued
Help You Negotiate an Agreement with a Broker
Help You Negotiate and Draft a LOI
Help You Negotiate and Drat a Sales Agreement
Help You Comply with Your Due Diligence Requirements
Help You Comply with Contracts, Rules and Regulations
Help You Prepare for Closing
Help You During Closing
Help You After Closing

Key Partners

When you have decided that selling your business is the best way to help you make progress towards your aspirations, dreams, and goals, and you have identified and analyzed your potential buyers and have decided that you are going to sell, then it is time to identify the strategic partners you need to help you take the next steps. The right broker can help you list your business for sale and identify and evaluate potential buyers. As Brokers only get paid if the deal closes, it is important to get independent advice about to the value of your business and to have a legal expert help you with the negotiation. At this stage, you should consult with your Private Corporate Counsel on how to identify, evaluate, and choose key external partners, including the following:

Choose the Key Partners

Business Broker
Industry Expert
Valuation Expert
Accountant and Tax Professionals
Special Legal Support
Consultants

Negotiate LOI

Once you have potential buyers and they are preliminarily vetted as qualified buyers, then it is time to begin the negotiation phase. Typically, the first document negotiated is the Letter of Intent (“LOI”). At this stage, it important for you to talk to your Private Corporate Counsel about the key terms of the deal, including:

Negotiate a Letter of Intent (“LOI”)

Price Terms
Assets of the Entity to be Sold
Key Dates for Disclosure
Key Timeline for Due Diligence
Scope of NDA and Confidentiality Agreements
Contingencies of the LOI
Date to Move from LOI to Contract
Complete the Vetting of the Buyer

Negotiate Purchase Agreement

After you have negotiated a LOI and both parties have signed off, you will have an opportunity to do some preliminary due diligence on the buyer, while the buyer is conducting due diligence on the business. If both sides are satisfied with the initial due diligence, then it is time to begin to negotiate the Purchase Agreement (a Stock Purchase Agreement, if the target is a Corporation, or a Membership Purchase Agreement, if the target is a Limited Liability Company, or an Asset Purchase Agreement if an Asset Sale). Consult with and leverage your Private Corporate Counsel to help you negotiate the following key points to effectively protect your interests and maximize your potential to get a fair deal.

This is a good time to talk to your Private Corporate Counsel about the following:

Negotiate The Entity Purchase Agreement

Negotiate the Price and any Contingencies
Negotiate & Identify the Physical Assets Being Sold
Negotiate & Identify the Intangible Assets Being Sold
Negotiate and Identify the IP Assets Being Sold
Negotiate the Assignment of Key Contracts and Releases
Negotiate & Identify the Company’s Liabilities to be Assumed
Identify the Key Timeline for Additional Due Diligence
Negotiate Worker Benefits
Negotiate Remedies for Breach
Negotiate the Deposit
Negotiate Seller Financing, if Beneficial to Seller
Negotiate Transition Management Terms
Negotiate Other Key Terms
Draft the Sales Agreement
Draft Due Diligence Confidentiality Agreement
Draft Due Diligence Non-Compete Agreement
Draft Due Diligence Non-Disclosure Agreement
Draft Due Diligence Non-Solicitation Agreement

CAUTION: DO NOT ALLOW A BROKER, SELLER, OR BUYER’S ATTORNEY TO FORCE YOU INTO SIGNING THEIR AGREEMENT.

Due Diligence

The due diligence phase of the process is critical. With the help of your Private Corporate Counsel, consider and adress all relevant issues, including:

Due Diligence

Organize, Review and Provide Financial Statements

Organize, Review and Provide Real Estate Records

Organize, Review and Provide List of Tangible Assets

Organize, Review and Provide List of Intangible Assets

Organize, Review and Provide Employee Files

Organize, Review and Provide Non-Employee Worker Files

Organize, Review and Provide Vendor Files

Organize, Review and Provide Suppler Files

Organize, Review and Provide Bank Statements

Organize, Review and Provide Business Tax Returns

Organize, Review and Provide Litigation History and Cases

Organize, Review and Provide Organization Records

Organize, Review and Provide Proof of Good Standing

Organize, Review and Provide Auditor’s Letters

Organize, Review and Provide Company’s Budgets and Plans

Organize, Review and Provide Internal Control Procedures

Organize, Review and Provide Other Relevant Records

Ensure Enforcement of Due Diligence Protection Agreements

Address Issues as they Arise

Negotiate Addendums Based on Due Diligence

Closing The Deal

If your due diligence did not uncover any deal breakers, then it is time to begin the process of preparing to close the deal. At closing it is important to have your Private Corporate Counsel present to ensure that you understand all of the documents being signed, that the documents are executed correctly, and that any unexpected issues get resolved.

Close the Deal and Manage Transition

Prepare for Closing
Closing Checklist
Escrow Services
Review, Analyze and Advise on Closing Documents
Ensure Assignments of Key Contracts
Ensure Releases of Liability on Key Contracts
If Seller’s Financing, Ensure Adequate Collateral
If Seller’s Financing, Ensure Security Agreements Signed
If Seller’s Financing, Ensure Correct Documents Recorded
Ensure IRS Compliance
Confirm Transition Management Issues Addressed

Manage Risks

Successful entrepreneurs who exit their business recognize that there are always risks to their personal assets.They also recognize that changes in the environment, technology, and politics are unpredictable and can be devastating. They must take steps to protect their assets, by creating a comprehensive plan. The earlier they engage in risk mitigation planning, the more chances they have of creating a plan that will be effective when they need it. Therefore, at the onset, it is a good idea to talk to your Private Corporate Counsel about the following:

Reduce Your Risks with Advice and Planning

Asset Protection Planning
New Venture Planning
Estate Planning
Segmentation of Risky Assets
Key Contracts to Limit Risks
Key Insurance to Cover Risks
Ready Access to Private Corporate Counsel to be Proactive

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Effective Tools

While contracts are an effective tool to protect your business against risks and threats from internal workers and external partners, you can enhance this protection by having good policies and procedures in place to guide your workers in their daily tasks and to ensure that everyone complies with the standards you set for the business. This will help create and maintain the positive culture you want and need to improve and grow your business. Therefore, it is a good idea to consult with your Private Corporate Counsel about the following:

Evaluate and Update Policies

Anti-Discrimination Policies

Anti-Harassment Policies

ADA Policies

Vacation, Sick Leave and Volunteer Leave Policies

Pay and Overtime Policies

Conflict Resolution Policies

Performance Improvement Plan Policies

Grooming and Dress Policies

Media Policies

Social Media Policies

Crisis and Disaster Relief Policies

Start Building Your Crisis Management Plan Today

Download your free guide, Managing Your Business Through a Crisis: 7 Steps to Success, and discover the top recommended ways to prepare your company for the unexpected.

Get Personalized Guidance From PCC

Request your free consultation and we’ll get you started on implementing strategies to protect your business.