Arizona Tax Tips for Selling Your Business
Arizona Tax Tips for Selling Your Business
Selling a business in Arizona isn’t just about signing papers. It’s a big step, filled with decisions that affect your money, your future, and your peace of mind. Whether you’re cashing out to enjoy the dry heat in a new boat or RV, or planning a new business venture in the Valley, knowing your tax stuff ahead of time can save you big headaches.
This article covers key points like capital gains tax, depreciation recapture (when you have to pay back some tax savings), and other things that can affect your finances. If you have any questions, feel free to contact us.
Capital Gains: What You Really Pocket
When you sell your business, the IRS may want a piece of your profit. But if you’ve owned the business for over a year, there’s good news: you might qualify for long-term capital gains tax rates. These rates are usually lower than your regular income tax, which means you could keep more of your money. Think of it like getting a hometown discount on taxes, kind of like catching a deal during the off-season in Tucson. The longer you’ve held on, the better your chances for a lower tax bill.
It’s important to know what counts as a “gain.” This is the amount you make after subtracting what you originally invested and any improvements you paid for. So if you bought your business for $100,000 and sell it for $300,000, you’ve got $200,000 in capital gains. Depending on how the sale is structured, parts of that gain might be taxed differently. Planning ahead and working with a tax advisor can help you lower what you owe, and pocket more of what you’ve earned.
Watch Out for Depreciation Recapture
When you sell your business, you’re not just selling the big stuff like your building or company name. You’re also selling things like equipment, furniture, or machines you’ve used over the years. If you claimed tax write-offs for those items through depreciation, the IRS might come calling to collect a portion of those savings. That’s what they call depreciation recapture.
Here’s how it works. Let’s say you bought a truck for your business and wrote off its value over several years. When you sell that truck, any money you get for it above its written-down value may be taxed at your regular income rate, not the lower capital gains rate. That can add up quickly and catch people off guard if they’re not expecting it.
The best move is to plan for this early. Talk with your tax advisor about what assets you’ve depreciated and how a sale might affect your taxes. It’s better to build it into your strategy now than to get hit with a surprise tax bill later, especially when you’re already juggling a major financial move.
Net Investment Income Tax (NIIT)
If your business sale brings in a big profit and pushes your total income past a certain limit, you could owe an extra 3.8% tax on top of everything else. This extra charge is called the Net Investment Income Tax, or NIIT. It’s like a sneaky heatwave that shows up just when you thought you were in the clear. A lot of business owners don’t see it coming until it’s too late.
NIIT usually applies when your modified adjusted gross income goes above $200,000 for individuals or $250,000 for married couples filing jointly. It affects things like capital gains, rental income, and dividends, basically, the extra money you make beyond your regular paycheck. Selling a business can easily tip you over that line.
To stay ahead of it, talk with your CPA before you close the deal. You might be able to structure the sale differently, spread income over a few years, or take other steps to reduce the impact. A little planning now can save you from a tax surprise later, especially if your financial summer is already heating up.
State & Local Arizona Taxes
When you sell a business in Arizona, you need to do more than just think about federal taxes. Arizona has its own tax twist called the Transaction Privilege Tax, or TPT. Unlike a typical sales tax that’s charged to the buyer, TPT is actually a tax on the seller for the privilege of doing business in the state. That means if you’re selling a business, especially one that’s been earning income in Arizona, the state wants a cut.
TPT rates can vary depending on your city and the kind of business you ran. Cities like Tucson, Mesa, and Chandler may have different rules or add-on taxes that apply on top of the state rate. If you’re not careful, you could end up with unexpected bills from multiple levels of government.
Before you make the sale final, check with a local tax expert who understands the TPT rules in your area. They can help you register, file the right paperwork, and avoid penalties. It’s one of those things that’s easy to miss, but just like Arizona summer heat, it can burn you if you’re not ready.
Installment Sales: Take It Slow
Selling your business doesn’t always mean getting a big check all at once. In fact, sometimes it’s smarter to go the slow-and-steady route. That’s where an installment sale comes in. It lets the buyer pay you over time, maybe over a few years, instead of everything upfront. You still get the full sale price, just in smaller pieces.
The big benefit? You only pay taxes on the money you receive each year. So instead of taking a huge tax hit in one year, your income, and your tax bill, can be spread out. This can help keep you in a lower tax bracket and give you more control over your cash flow. It’s kind of like sipping a raspado on a hot day instead of chugging it all at once.
But installment sales do come with a few things to think about, like interest, default risk, and how it fits into your long-term plans. A tax advisor or financial planner can help you decide if this approach makes sense for your situation.
QSBS & Section 1202: Big Breaks for Small Biz
If you started a small business and stuck with it for a while, you might be in for a huge tax break. Section 1202 of the tax code offers something called the Qualified Small Business Stock (QSBS) exclusion. If your company meets the right requirements, you could exclude up to 100% of the capital gains from your federal taxes when you sell your shares. That’s right, some or even all of your profit could be completely tax-free.
To qualify, your business needs to be a C corporation, and you must have held your shares for at least five years. There are also limits on the size of the company and the kind of work it does. Not every business fits the mold, but if yours does, this rule can save you tens or even hundreds of thousands of dollars.
The tricky part is making sure all the boxes are checked. If you think your company might qualify, talk with a tax pro who understands QSBS rules. A little paperwork and planning now can lead to a massive payoff when it’s time to sell.
Consider an ESOP
If you’re thinking about stepping away from your business but still want to see it thrive, an Employee Stock Ownership Plan (ESOP) might be the perfect path. With an ESOP, you sell your business (gradually) to your employees. They become the new owners over time, and you get to walk away knowing the company is in familiar hands.
Beyond preserving your business legacy, ESOPs come with solid tax advantages. You may be able to defer or reduce capital gains taxes, and in some cases, the business itself can enjoy ongoing tax savings. It’s a win-win, your team gets a stake in the company’s future, and you get financial benefits as you transition out.
Setting up an ESOP isn’t something you can do overnight. There are rules to follow and paperwork to handle, so it’s smart to work with professionals who’ve done it before. But if you care about your team and want a tax-savvy exit strategy, this could be the way to go.
Estate Tax Angle
Selling your business can bring in a big payday—but it might also raise the value of your estate more than you realize. If your total assets, including the proceeds from the sale, exceed certain federal limits, your heirs could face a hefty estate tax bill down the road. That’s a tough way for your family to remember your hard-earned success.
The good news is, you’ve got options. One smart move is to start gifting shares of your business before the sale happens. This can gradually reduce the size of your estate while also helping family members or future owners get involved early. Another option is setting up a trust, which can give you more control over how assets are handled after you’re gone.
If your business includes high-value property like land in Scottsdale, 55+ retirement developments, or commercial real estate in the East Valley, it’s especially important to plan ahead. An estate planning pro can help you create a strategy that protects both your legacy and your loved ones from surprise tax burdens.
Final Tip: Get Local Help
Selling a business in Arizona isn’t just about crunching numbers—it’s about understanding the local landscape. The state has its own tax rules, filing requirements, and little surprises that can throw a wrench in your plans if you’re not prepared. From unique zoning issues to quirks like swampboxes, flood irrigation, and even city-specific TPT filings, you’ll want someone in your corner who’s seen it all before.
That’s why it’s worth teaming up with an Arizona-based advisor. They don’t just understand the federal tax code—they know how things work right here, from Flagstaff to the East Valley to the outskirts of Yuma. Whether it’s dealing with property values, regional incentives, or state tax deadlines, they can guide you through it without the guesswork.
At the end of the day, local knowledge matters. A trusted advisor who knows both the Arizona business scene and I-10 traffic patterns is exactly who you want helping you close the deal cleanly, confidently, and without unnecessary tax headaches.
FAQs
What are the tax implications of selling a business?
When you sell a business, you’ll likely owe taxes on the profit you make, and the amount depends on a few key factors. The biggest one is how long you owned the business. If you’ve owned it for more than a year, your profit may qualify for long-term capital gains tax rates, which are usually lower than regular income tax rates.
If you’ve owned it for less than a year, it might be taxed as ordinary income, which could be a higher rate. Other parts of the sale, like equipment or property you depreciated, may trigger depreciation recapture, which is taxed differently. Depending on how much you make from the sale, you could also be hit with additional taxes like the Net Investment Income Tax. All of this adds up, so it’s smart to plan ahead with a tax professional who can help you understand your full tax picture and find ways to reduce what you owe.
What is the capital gains tax rate for selling a business?
The capital gains tax rate you’ll pay when selling a business depends on how long you’ve owned it and your overall income. If you’ve owned the business for more than one year, your profits are usually considered long-term capital gains, which are taxed at lower rates, typically 0%, 15%, or 20% depending on your income level.
If you’ve owned the business for less than a year, the profits are considered short-term capital gains and are taxed at your regular income tax rate, which can be significantly higher. These rates can make a big difference in how much you end up keeping after the sale. That’s why holding your business for at least a year before selling it can lead to major tax savings.
Are there tax deductions or exemptions when selling a business?
Yes, there are several tax deductions and exemptions that can help reduce the amount you owe when selling a business. One common strategy is to offset your capital gains with capital losses from other investments, which can lower your overall taxable profit. There are also special provisions in the tax code that can offer major benefits, like the Qualified Small Business Stock (QSBS) exclusion under Section 1202.
If you meet the requirements, this rule could allow you to exclude up to 100% of your capital gains from federal taxes. In addition, you may be able to deduct certain selling expenses, legal fees, or investment advisory costs related to the sale. These opportunities can add up quickly, so it’s a good idea to work with a tax professional who can help you navigate your options and take full advantage of what’s available.
Is there a difference between selling assets and selling the whole business?
Yes, and the difference can have a big impact on your taxes. When you sell individual assets—like equipment, inventory, or real estate—each item may be taxed differently based on how it was used and whether it was depreciated. Some assets may trigger capital gains taxes, while others could result in ordinary income due to depreciation recapture.
On the other hand, selling the entire business, especially if it’s structured as a stock sale, may be taxed more simply as a single capital gain. Buyers often prefer asset sales because they can write off the purchased assets more easily, while sellers may favor stock or entity sales for better tax treatment and fewer complications. Understanding the tax consequences of each option is key, so it’s smart to review your situation with an accountant or tax advisor before making a deal.
How can you lower the tax impact of selling a business?
There are several strategies you can use to reduce the tax burden when selling a business. One option is to structure the deal as an installment sale, which spreads your income (and the related taxes) over multiple years instead of taking the full hit all at once. This can help keep you in a lower tax bracket year over year. You might also qualify for special tax breaks like the QSBS exclusion under Section 1202, which can wipe out a large portion of your capital gains if your business meets certain requirements.
Don’t forget about deducting expenses related to the sale, like legal or advisory fees. You can also offset gains by using losses from other investments. The right combination of these tactics depends on your business structure, how long you’ve owned it, and your broader financial picture. A tax expert can help you build a custom plan to minimize what you owe and maximize what you keep.
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Turn to the Professionals for Best Results
There is a direct relationship between the asking price and the amount of cash on the table at the time of the sale. Buyers and sellers alike should keep one fact in mind. Most businesses involve some level of seller financing. It is customary for both buyers and sellers to have concerns regarding this kind of financing; after all, sellers don’t want to take their businesses back from the buyer. Buyers want to generate enough money to help the business thrive and make a living. One proven way to ensure the successful sale of a business is to turn to the experts.
Screen out Window Shoppers
The simple and very established fact is that when you choose to work with the professionals, it can streamline the entire sales process. Business owners are typically very busy people. That means they don’t have time to waste with window shoppers. They also don’t want to divulge confidential information to parties that don’t possess the means to actually follow through with a successful sale.
Business brokers and M&A advisors know that most prospective buyers are just dreamers or will ultimately fail to qualify. When you work with the professionals, it means that you have a shield to protect you and your valuable time. Experienced brokers have a range of techniques that screen out unqualified candidates and match you with buyers who are the best fit.
Maintain Confidentiality
Anyone who has ever sold a business, or even contemplated selling a business, knows all too well that confidentiality is of the utmost importance. Sellers need to know that the information they reveal will not spill out all over the web. Brokers are experts maintaining confidentiality and impressing upon prospective buyers the tremendous importance of honoring the agreements they sign.
It is important to note that leaks regarding the sale of a business can cause a range of often unexpected problems. Key employees may get nervous about their future prospects and begin looking for a new job, competitors may begin attempting to poach employees, or customers and key suppliers may get nervous and turn to your competitors. In short, serious buyers and sellers alike benefit from maintaining confidentiality.
Matching the right seller with the right buyer is truly an art and a science. Many factors are involved ranging from financing to psychology. When the right match is made, then it is possible to move through the process of seller financing more quickly and with fewer roadblocks or complications. Working with a business broker or M&A advisor is the single most important step that any buyer or seller can make to help ensure that seller financing, and in fact the entire sales process, progresses as smoothly as possible.
Copyright:Business Brokerage Press, Inc.
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Seller Financing: It Makes Dollars and Sense
When contemplating the sale of a business, an important option to consider is seller financing. Many potential buyers don’t have the necessary capital or lender resources to pay cash. Even if they do, they are often reluctant to put such a hefty sum of cash into what, for them, is a new and untried venture.
Why the hesitation? The typical buyer feels that, if the business is really all that it’s “advertised” to be, it should pay for itself. Buyers often interpret the seller’s insistence on all cash as a lack of confidence–in the business, in the buyer’s chances to succeed, or both.
The buyer’s interpretation has some basis in fact. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease payments–for any reason–the seller would be forced either to take back the business or forfeit the balance of the note.
The seller who operates under the influence of this fear should take a hard look at the upside of seller financing. Statistics show that sellers receive a significantly higher purchase price if they decide to accept terms. On average, a seller who sells for all cash receives approximately 70 percent of the asking price. This adds up to approximately 16 percent difference on a business listed for $150,000, meaning that the seller who is willing to accept terms will receive approximately $24,000 more than the seller who is asking for all cash.
Even with these compelling reasons to accept terms, sellers may still be reluctant. Selling a business can be perceived as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore, it is important to note that seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.
- Seller financing greatly increases the chances that the business will sell.
- The seller offering terms will command a much higher price.
- The interest on a seller-financed deal will add significantly to the actual selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried. Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)
- With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
- The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
- Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms as a vote of confidence.
Obviously, there are no guarantees that the buyer will be successful in operating the business. However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line–in many cases, their entire capital. Although this investment doesn’t insure success, it does mean that the buyer will work hard to support such a commitment.
There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to buyers, they will, in most cases, be helping themselves as well.
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The Main Street Lending Program
There is no doubt that the COVID-19 situation seems to change with each and every day. The disruption and chaos that the pandemic has injected into both daily life and business is obvious. Just as it is often difficult to keep track of the ebbs and flows of the pandemic, the same can be stated for keeping up to speed on the government’s response and what options exist to assist companies of all sizes.
In this article, we’ll turn our attention to an overlooked area of the government’s pandemic response and how businesses can use a whole new lending platform to navigate the choppy waters.
As the pandemic continues, you will want to be aware of the main street lending program, which is a whole new lending platform. It was designed for businesses that were financially sound prior to the pandemic. Authorized under the CARE Act, the main street lending program is quite attractive for an array of reasons. Let’s take a closer look at what makes this program almost too good to be true.
This lender delivered program is a commercial loan. Unlike the PPP, there is no forgivable component. However, the main street lending program does have one remarkable feature that will certainly grab the attention of all kinds of businesses. It can be used to refinance existing debt at a rate of around 3%. With that stated, it is also important to note that businesses cannot refinance existing debt with the current lender. Instead, a new lender must be found. Generally, loans are a minimum of a quarter million dollars and have a five-year term. In another piece of good news, there is a two-year payment deferment period.
The main street lending program can be used in a variety of ways. In short, the program is not simply for refinancing existing debt. Additionally, there is no penalty for prepayment. The way the program works is that lenders make the loans and then sell 95% of the loan value to the Fed. This of course means that the lender is only required to retain 5% of the loan on their balance sheet. The end result is that lenders can dramatically expand the amount of loans they can make.
Whether it is the PPP or a program like the main street lending program, there are solid options available to help you. Businesses looking to restructure debt or put an infusion of cash to good use may find that the main street lending program offers a very flexible loan with great interest rates.
Copyright: Business Brokerage Press, Inc.
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Why Does Your Business Need Google Reviews?
In today’s business climate, reviews are the differentiator. Years ago, people commonly asked for references when they were vetting a product or service. But these days when people are searching for a local business to work with, they are likely to conduct research on their own and read online reviews.
Google reviews can give businesses a big credibility boost without having to spend a dime. Let’s take a look at some of the key benefits.
Increased Credibility & Trust
According to statistics, approximately 91% of consumers read reviews to determine credibility of a local business. In fact, 84% of consumers say the positive reviews have helped them gain trust. Without the reviews, that level of trust would not have been established.
Needless to say, people trust Google. The fact that these reviews are on a 3rd party website increases transparency. These reviews have much higher value than testimonials posted on the actual business website.
Improved Business Conversions
Once a potential customer gains trust in your company through reading Google reviews, it is more likely the conversation will get converted to an actual business transaction.
Customer Feedback Loop
When your customers write reviews about your business and post them on Google, these reviews often clearly mention details about your product or service. Through this means, future customers become educated. These reviews can also serve as a feedback loop for you if things need improvement.
Increases Online Reputation & Visibility
The power of online marketing methods you might be using to promote your business will be amplified, as users will become more attracted to your business due to 5-star reviews. This factor increases online traffic to your website and an increase in leads and business.
Another fact to be conscious of is that your clients will review your products or services whether you want them to or not. If you fail to set up Google reviews, you’re missing out on the opportunity to gain a level of control and visibility.
How to Set Up Google Reviews
- Create a Google My Business account. – Visit https://business.google.com/ to sign in or create a Google account for a business. Complete the step by step process by filing required information like email, phone number, business details, etc.
- Ask clients to review your services. – Start sharing your Google My Business URL with clients and ask them to post a review about your services. When asking for reviews, you can mention to clients that their review will help everybody else make an informed decision when they are looking for help. It is important to ask about the review within a few days of closing your transaction. If more time goes by, the client may be less motivated to post a review for you.
- Remind clients. – Everybody is busy. Therefore, there is a chance that your client might forget to write a review. In this case, we recommend reminding them to do so. You can also politely inquire if they need any help posting the review that you discussed.
Through the above-mentioned process, you can begin generating reviews for your business. Of course, it goes without saying that you can only guarantee good reviews when you are providing excellent customer service along with a top-notch product or service.
Copyright: Business Brokerage Press, Inc.
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