Even if you just opened your ecommerce business, it’s important to have an exit strategy. For most business owners, this involves selling. There are a few different ways you can sell your business, each of which comes with different tax scenarios.
Whether you are finally ready to collect on the years of hard work building your ecommerce business or just starting out, here are three tax secrets you need to know about selling a business.
Understanding Basis
Your business is an asset, which means it draws in basis rules. Basis is your stake in the company and includes everything you’ve made in the past, contributed, and distributed. With the right ecommerce accounting services, you should be able to track down this information.
Let’s say that you are selling your ecommerce business for $500,000. You initially contributed $100,000, earned $300,000 over the past few years, and took $200,000 in distributions. Your basis in the company would be $100,000 + $300,000 – $200,000 or $200,000.
Subtracting your basis from the gross selling price of $500,000 leaves you with a $300,000 gain potentially subject to taxes. If you have no idea what your basis currently is, contact an ecommerce CPA near you to get started.
Secret #1: Qualified Small Business Stock Exemptions
A Qualified Small Business Stock Exemption, also known as a QSBS, unlocks a 100% tax exemption from capital gains for certain business owners. To qualify for a QSBS, you must acquire shares from an active US C Corporation, hold the shares for at least five years, and be invested in a corporation with under $50 million in assets before and after the stock issuance.
Once you sell your shares in the company, you will pay $0 in Federal taxes, which is limited to $10 million or 10x your investment. If you sell within the five-year period, you can roll your gain into another QSBS within 60 days. Remember, this exemption only applies to C Corporations. If your business is not set up under this structure, consult with an Amazon FBA CPA or a Shopify CPA to consider switching over.
Secret #2: 1031 Exchange
The next tax secret is a 1031 exchange. Traditionally, 1031 exchanges are used in real estate transactions; however, they can also be applied to business sales. If you sell your business and purchase a similar business within 180 days, you can defer your capital gain taxes. Note that this is a deferral method, not a complete elimination of your tax liability.
For example, let’s say you want to move into a different niche of ecommerce. You sell your business for $300,000, which generates $150,000 of capital gain tax. Within 45 days, you identify a new business for $400,000 and complete the transaction in 180 days. Your basis in the new business will be the purchase price less the previous gain or $250,000.
Lowering your basis in the company will trigger higher capital gain taxes when you go to sell your new company. Additionally, it’s important to be aware of the strict deadlines and the potential side effects of a lower basis. Consult with an Amazon tax accountant or a Shopify CPA to learn more.
Secret #3: Installment Sale
The third secret is to use an installment sale method when recognizing the gain from your ecommerce business. Under the installment sale method, you pick up a portion of the capital gain tax over a certain time period. This can result in lower tax rates as you aren’t reporting the entire transaction in one year.
Let’s say you have a $150,000 gain from the sale of your business. If you pick up the entire gain in the year of the sale, you might be subject to higher tax rates on the gain and your other income sources. Now, let’s say that you spread the gain out over 10 years. You will only report about $15,000 of capital gain income each year.
The drawback of this method is that you do not receive the entire payment for your company upfront. Instead, the buyer will make installment payments over 10 years. Additionally, you will receive interest income from the sale, like any other loan. Although this can increase your total amount of compensation from the sale, it will be taxable.
Summary
There’s no one-size-fits-all approach when it comes to selling a business. This is why it’s important to work with the right ecommerce accountants to maximize your sale terms and taxes. Contact one of our team members today to learn more about how we can help you navigate your ecommerce business sale.
