Experts estimate that the year 2020 will see a record number of small businesses coming up for sale. Statistics show that the average age of a small company owner is 60 years old, and at least 40% of companies will be put up for sale in the market. If you’ve been thinking of finalizing a deal and retiring abroad, you’ll want to do some research and consult an expert tax consultant for information. Not only can you streamline the sale, but you’ll also get guidance on how to transfer your money and retire comfortably.
Let’s Talk About Selling Your Small Business
One of the key factors that can get in the way of a successful deal is a weak exit plan. Many entrepreneurs are not prepared with the necessary paperwork and financial statements. Should you consult an expert business broker, New Jersey tax laws will become clearer. Make inquiries into the taxes you’ll pay, and work out the terms of the sale so you don’t overdo your obligations to the IRS. Here are a few of the main points to consider.
1. Taxation Depends on the Capital Gains from the Sale
The IRS Form 8594, Asset Acquisition Statement, differentiates the assets you’ll sell as a part of the sole proprietorship. Like taxation laws outline, each of the seven categories of assets is taxed as capital gains or ordinary income. For instance,
- Class I includes cash in hand and balances in checking accounts, which is taxed at 35%.
- Any fixed assets that you’ve held for more than 12 months incur capital gains tax upon their sale. At the time of calculating the value, you’ll deduct depreciation from the original purchase price and pay a tax of up to 15%on the balance.
- Inventory is also taxed as ordinary income.
- Class VII includes the goodwill and going-concern value. Since goodwill is an intangible asset, the buyer will want to ascertain if the business seller has personal goodwill or if the goodwill is related to the company as a separate entity. The IRS taxes the sale accordingly.
Negotiate the terms of the sale with the buyer by including as many assets as permitted by the IRS in the capital gains category, so you can reduce associated taxes.
2. Lower Applicable Taxes by Deferring Payments
If you opt to receive all the payments for the business within a single financial year, you’ll pay higher taxes. Experts advise that you to defer payments and receive them in instalments over the next few years. This can be a difficult decision because you’ll carry the risk of the buyer defaulting on payments, especially if the business loses value once you exit. Prevent the sale from falling into higher tax brackets by choosing alternative payment options.
For instance, you could negotiate a deal with earn-out payments where you’ll receive compensation when the company attains pre-specified goals. Or, you could go with seller-financed loans. Yet another option is to sign up with a third-party tax-deferral finance company and lower the risk of buyer default.
3. Classification of the Company Influences Taxation Regulations
The classification of the company as a proprietorship, partnership, limited liability company (LLC), or incorporated will also influence the taxes you pay. If the company is a corporation, you can either sell the stocks you own in the company to the buyer.
Alternatively, you’ll get the corporation to sell its assets to the buyer. Make sure that you understand how IRS regulations apply by working with an expert tax consultant.
For instance, in the case of a C corporation, you might end up paying double taxation. That’s because the company will incur capital gains tax when selling its assets. But, when the company is dissolved, you’ll also pay capital tax gains on the stock being sold. For this reason, you might want to sell only the stock.
Having Sold the Company, You Can Transfer Funds to Your New Location
Once you’ve cleared the capital gains and any other tax obligations, you can move the funds from the sale of your business to an overseas location. The IRS requires you to inform them of your intentions when making large transfers but you likely won’t incur any other taxes.
Close to 1.4 million U.S. expatriates retire overseas to take advantage of a lower cost of living, more economical healthcare, warmer weather conditions, or simply to live close to family and friends. Before choosing to move, you may want to make inquiries about the tax implications. Your new country of residence might require you to declare and pay taxes on the funds that you’re bringing in. It is advisable to use wire transfer in place of bringing large amounts of cash. Opt for one of the many platforms that assist you in sending money out of the country.
US Citizens Continue to Pay Taxes Back Home
As long as you retain status as a US citizen, you’ll continue to file taxes with the IRS back home. Work with an expert tax attorney to help you add up the income from foreign sources along with the taxes you’re paying in the host country. The US government has agreements with most countries across the world. Accordingly, if you’re paying taxes in a foreign country, you can claim deductions on the US return.
Further, you can also claim Foreign Earned Income Exclusion by which your income up to a specified limit is not taxable. You’ll pay taxes only on the remaining amount earned. Additional exclusions are also available to allow you to save on taxes. Having retired, you’ll continue to receive Social Security checks from the IRS.
Making the transition from a US small business owner to a retired US expat can be a complex process with different tax implications. Take your time gathering all the necessary information and get expert advice from a tax consultant. Stay compliant with the laws of the US and the country where you’ve chosen to reside. Sell your business and retire comfortably with adequate funds to enjoy your golden years.
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