What type of tax do i charge the buyer of my business? If any.?

Question

I am selling my business in california, and have a buyer, while writting up the contract i wonder if i have to charge state and/or local taxes.

Answer 1

The California SBE does impose sales tax on the sale of the assets of a business where the seller of the business was a registered vendor for sales tax purposes. All of the sales price allocated to equipment will be subject to sales tax. The portion of the sales price allocated to inventory and goodwill will not be subject to sales tax. The price allocation that you have to do for the IRS will determine the prices for sales tax purposes as well. California does not have a sale of business exemption from sales taxes and the prior answer was likely not from California.

Answer 2

You do NOT charge any kind of tax upon your sale of a business. However, for IRS purposes...you need to exactly agree with (and document with) the buyer regarding how the purchase price is being allocated among the items being sold. For example, how much of the price is for inventory, for equipment, for client lists, etc?. The residual will always be put to goodwill (or some other blue-sky type asset). This allocation is important for each of you. The more blue sky you sell...the less taxes you might pay as a seller...since this will all be capital gains. The buyer would like to have more of the price allocated to equipment so he could depreciate it more quickly than he can amortize the blue-sky. By the way...this allocation is supposed to be provided on a specific tax form...with information provided by each person to complete the form. The best time to do this is BEFORE the transaction is consumated...because things sometimes get dicey after the sale and seller and buyer don't cooperate with each other. One other thought...if you are selling all of the stock in a corporation .... instead of all the assets of a business... then you don't have to do this allocation exercise. You still do NOT charge any kind of taxes upon the sale. In this case all of the sales price that is greater than what you had in the stock would be a capital gain...which is the best tax rate for you. However, buyers don't generally like to buy all the stock of a small corporation...since they also are liable for any liabilities outstanding that no one tells them about. So, usually, when businesses are sold...people sell the assets...not the stock.