For a business owner to successfully negotiate the sale of a business, it is critical to understand the tax implications. Armed with this knowledge, you can assess the impact of various transaction structures and sales price allocations on your net proceeds from the sale and potentially adjust the sales price accordingly.
Business owners tend to focus on the federal tax implications of a sale, but do not ignore state income taxes. Now that federal tax rates are lower than they have been in the past, state taxes may take on added significance. If you are contemplating relocating or retiring to another state, it may make sense to consider moving before you sell the business ― especially if the new state has lower, or even no, state income tax.
Before you attempt this strategy, however, be sure to consult a qualified tax advisor. Changing your domicile and residence for tax purposes is not like flipping a switch. You will need to take several specific actions to demonstrate your intent to establish a permanent place of abode in the new state, such as obtaining a driver’s license, registering to vote, and becoming involved with local organizations and activities. A good professional tax advisor can provide a detailed checklist to guide you along this process.
Keep in mind, too, that there may be rules about the number of days spent in the state. So, you may have to do more than take the steps above to show that you are a resident of your new state. For instance, if you live in your “old” state most of the year and spend only a couple months in your new state, you could find that, at least for tax purposes, you are deemed a resident of both states. We can help you prepare for the state tax implications of a business sale.
RJI CPAs Can Help
There are many issues to consider when a business owner puts their company up for sale. We have experts specializing in complex state taxation that can answer your questions and provide guidance. Contact us today for a consultation.