Illinois business tax: minimizing taxes when selling a business

One of the downsides of selling an Illinois business is the taxes. This is why a lot of businesses were sold last year before the rise in certain taxes took affect. A business tax that has increased five percent this year is the long-term capital gains tax. The increase in this tax alone has some business owners cringing.

However, there are ways to minimize the damage. Setting up an employee stock ownership plan (ESOP) for a C corporation can help defer tax liability from a sale. Once the sale money is received, section 1042 of the Internal Revenue Code allows a rollover into a tax-deferred account. Taxes can be delayed until a distribution is taken or not paid at all if they are kept until death.

The Qualified Small Business Stock Exception applies to businesses that aren't service based. The capital gains tax can be avoided from 50 to 100 percent. Setting up a business to take advantage of this exception could help to avoid high taxes if the business is ever sold. Of course, it may be possible to change the makeup of the business in anticipation of a later sale.

A business can also be changed from a C corporation to an S corporation. When stock is sold in an active S corporation, the Medicare Surtax of 3.8 percent will not be due. This could translate to thousands, hundreds of thousands and even millions of dollars in tax savings.

Every Illinois company will have to pay some business tax. However, it is possible to limit the total amount by reducing or even eliminating at least some of the taxes that will be due. Business owners may find it beneficial to consult with a professional on the best way to structure their business right from the beginning to not only limit taxes when and if a business is sold, but throughout the life of that business.

Source: Forbes, Selling Your Business? 3 Ways To Cut The Tax Bite, Ashlea Ebeling, Sept. 6, 2013

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