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  • Michael J. Conard, Jr. EA

Capital Gains versus Ordinary Income: What to Know When Selling Your Business

Selling your business is a significant milestone that requires careful consideration of various financial aspects, particularly how the proceeds from the sale will be taxed. Understanding the difference between capital gains and ordinary income is crucial for effective tax preparation. In this post, we'll explore these concepts and provide insights for business owners in De Pere and Green Bay.


When you sell your business, the profit you make from the sale can be classified as either capital gains or ordinary income. This classification impacts how much tax you'll owe. Capital gains are the profits from the sale of assets, such as your business, which you have held for more than a year. These gains are typically taxed at a lower rate compared to ordinary income, which includes wages, salaries, and business earnings.


For business owners in De Pere, recognizing the distinction between capital gains and ordinary income is essential. The sale of business assets, like equipment, inventory, and real estate, may result in capital gains. On the other hand, selling inventory or receiving payments for services provided before the sale would be considered ordinary income. Proper tax preparation can help you minimize your tax liability by appropriately categorizing your income.


In Green Bay, it's important to note that long-term capital gains, those on assets held for more than a year, are taxed at favorable rates, ranging from 0% to 20%, depending on your income level. Conversely, ordinary income is taxed at your regular income tax rate, which can be significantly higher. This difference underscores the importance of strategic planning when selling your business.


When preparing to sell your business, consider the allocation of the sale price among different assets. This allocation can influence how much of the proceeds are treated as capital gains versus ordinary income. For instance, allocating more of the sale price to goodwill or intangible assets, which are typically considered long-term capital gains, can reduce your overall tax burden. Engaging in detailed tax preparation with a CPA can help you make informed decisions about these allocations, benefiting your financial outcomes in De Pere.


Moreover, business owners in Green Bay should be aware of installment sales as a potential strategy. By spreading the payments over several years, you can defer a portion of the capital gains tax, thereby managing your tax liability more effectively. This approach allows you to pay taxes at a lower rate, aligning with your financial goals and improving your cash flow. Consulting with a tax professional for proper guidance is essential in such cases.


For business owners in De Pere, another important consideration is the potential for ordinary income treatment of certain proceeds, such as payments for services rendered before the sale or compensation for non-compete agreements. These amounts are taxed at your ordinary income tax rate, which could be higher than the capital gains rate. Understanding these nuances and engaging in thorough tax preparation can significantly impact your financial outcome.


In Green Bay, tax laws and regulations can be complex, and staying informed is vital. Engaging with a CPA who understands the local tax landscape can provide you with tailored advice and strategies to optimize your tax situation. Proper tax preparation, especially when selling a business, can lead to substantial tax savings and a smoother transition to your next venture.


In conclusion, differentiating between capital gains and ordinary income when selling your business is crucial for effective tax planning. Business owners in De Pere and Green Bay can benefit from strategic allocation of the sale price, considering installment sales, and understanding the implications of ordinary income treatment. Engaging in comprehensive tax preparation with a knowledgeable CPA can help you navigate these complexities and maximize your financial benefits. Reach out to our firm today to ensure you make informed decisions when selling your business.


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By focusing on these key aspects, you can ensure that your business sale is not only profitable but also tax-efficient, setting you up for future success.

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