Buying an Internet Business – Advanced Due Diligence What Taxes Are Involved When Selling My Online Business
Before finalizing the sale of your website, you should definitely plan for the taxes you will need to pay once the sale is done. Here you will a basic overview to know what you need to pay attention to and save your time and money when selling your online asset.
Most website sellers are sole proprietors or part of S Corporations, which means that their taxation levels will be the same as their personal taxes. And selling a website could create an event that throws you to a higher tax bracket, so be aware of that. If you are married, this adds an extra layer of complexity.
And should you pay income tax or capital gains tax? In short, if you have owned the asset for more than one year, then you could be subject to paying capital gains, typically lower than income taxes.
In general, a business is not sold as a single asset – instead, it is comprised of tangible and intangible assets, and each of them is treated accordingly when it comes to taxes. A CPA or a tax accountant will help you with this. A pro will also help you in avoiding mixing up non-capital assets and facing issues with the IRS.
Some examples of non-capital assets are stock in trade, inventory, accounts receivable, real estate, copyright, among others.
The main advantage of identifying what are capital assets is to identify gains and losses for taxation purposes. A capital gain/loss is the difference between the total assets and the sum of the cost of acquisition and cost of improvements.
If you kept accurate records, your Schedule D will show all the benefits, and consequently reduce your tax bill.
The best way to achieve this between a seller and a buyer is with an asset allocation agreement. This document defines the assets held over one year and their values. It ensures the seller pays the correct tax and it helps the buyer establish a proper basis when they decide to resell the website in the future.
You should also mind non-physical items, called intangible assets. Some examples are goodwill, workforce in place, business records, patents, copyrights, designs, formulas, patterns, processes, know-how, licenses, trademarks, among others. Only some of them are subject to capital gains taxation. The IRS clearly defines all of them, so make sure to check with your tax accountant or CPA.
The selling party can also deduce the fees of all advisers involved in the deal accountant, broker, lawyer, and so on.
As of recent, buyers have been using more and more financing, hold-backs, and even earn-outs. As a seller, a full cash deal is probably what you had in mind originally when selling your website.
However, a scheduled payment formula could be an interesting solution to reducing your tax burden throughout a longer period, as they happen. Your future earnings could fall into a lower capital gains bracket. On the other hand, your non-capital asset taxation will be paid in the year you sell your website, regardless of when you receive the payment.
A good CPA or tax accountant can give you more in-depth advice about how to properly your website sale. All the time you invest into planning this event can greatly help you to reduce your tax burden.
