Understanding Tax Implications When Selling Your Manufacturing Business

Planning to sell your manufacturing business? It’s natural to be eager to negotiate the sale with potential buyers. But before beginning negotiations, ask yourself, what are the tax implications of selling a manufacturing company?

It’s time to find out how taxation affects a business sale in terms of the net amount you receive. When you know how tax affects a business sale, you’re in a better spot to negotiate for the best deal and successfully sell your business. In this article, we’ll demystify the business sales taxes you should consider and their implications. 

What Is a Capital Gains Tax?

As defined in Forbes, capital gains taxes are charged on profits gained from selling an asset for more than the purchase price. 

For example, let’s say you started your manufacturing business with $200,000 and sold it for $900,000. The $700,000 profit you make could be taxed. The question is: How much capital gains tax will you pay? It depends on how long you owned the company before selling. 

For example, if your venture is a year old or more, the sales profit counts as long-term gain. The tax rate levied on long-term gains ranges from 0% to 20%, depending on how much you make annually. 

If the manufacturing business you’re selling is less than a year old, the gains could count as short-term. Note the IRS regards short-term capital gains as ordinary income.

As reported in The Wall Street Journal, the tax rate for short-term capital gain ranges from 10%-37%. Short-term capital gains are higher than long-term capital gains. 

What Are State-Specific Taxes?

Are you selling a manufacturing business in the US? If so, you must consider state and local taxes. 

True, the federal government has standard tax rates set across all states. However, some states have additional tax rates that impact the profit you take home after selling your business. For example, California charges an additional 1%-13% tax rate on capital gains tax (likely reducing profits).

Which States Don’t Have State Income or Capital Gains Taxes?

States like Texas, Illinois, Nevada, and Florida don’t impose state income or capital gains tax. So, if you’re one of the people thinking, “I want to sell my manufacturing business in Austin,” an attractive tax deal could be in your future. 

This means you only pay federal taxes and can, consequently, earn more profits when selling your business. With that said, research the taxes imposed on business sales transactions in your state. When we’re well informed, we can quickly navigate the sales process and save in taxes. 

What Is Depreciation Recapture?

Depreciation recapture is a tax charged on a profitable sale of an asset the taxpayer had previously used to offset taxable income. 

For example, let’s say you have been deducting the cost of assets used for your manufacturing processes through depreciation. What you have been doing is spreading the cost of assets and reducing annual deductible income tax. When selling the depreciated assets of your business for a gain, you’ll pay a depreciation recapture tax (taxes you saved during the time of depreciation). 

This tax is calculated at the regular income tax rate (typically higher than the capital gains tax). Ideally, depreciation recapture can be a significant expense during a business sale. Therefore, budget accordingly to maximize profits. 

Income Tax

Income tax is the tax collected from the revenue your business generates while it’s still operational. In the year you decide to sell your venture, you might generate more profits. As a result, you might find yourself in the higher tax bracket. This means you’ll likely pay a high tax rate for the gains you make after selling your manufacturing plant. 

How To Minimize Tax Implications When Selling a Manufacturing Business

Can you minimize the impact of taxes when selling your manufacturing business? It’s possible, and working with an experienced business broker can help streamline the process. 

Generally, the first thing a business broker does is calculate the value of your manufacturing business. Then, they can get started on investigating how to sell the company at a lower tax rate. 

Selling Options and Working With Business Brokers

You could sell the entire business at once or in installments. Whatever approach, dedicated brokers can help evaluate the tax impact of the sale. For example, an installment sale allows buyers to spread the payment of sales proceeds for the manufacturing business over several years. 

You can put off the capital gains tax to future years, thus generating a lower tax liability. Alternatively, you could allocate part of the sale price to tangible assets to allow for depreciation. 

Another thing business brokers do is advise clients on an opportune time to sell their manufacturing businesses. From a tax perspective, selling your business towards the end of the year can help reduce your income tax because the rates are lower. 

Conclusion: Tax Implications When Selling Manufacturing Businesses

Taxes, such as capital gains tax, depreciation recapture, state and local taxes, personal tax returns, and corporate tax can have the most significant impact on a business sale. These taxes could lower your profits if you don’t account for them when preparing the sale of your manufacturing business. 

Therefore, evaluate the taxes you’ll pay for profits or losses you make after selling your business. That way, you can aim to negotiate for selling prices that guarantee a high return on investment. You can also identify the best tactics to minimize tax implications on your business sale. Perhaps most importantly, reach out to expert business brokers for assistance: You don’t have to go through this process alone.

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