The Ultimate Tax Guide For Selling Your Amazon FBA Business

The Ultimate Tax Guide For Selling Your Amazon FBA Business
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It’s one of the most important considerations before deciding to sell your Amazon FBA business  – “If I sell my business, how much tax will I pay?”

You can research how the sale of a business is taxed in the 42 or so pages of IRS publication 544 – or you can get up to speed quickly with our short, informative guide.

In this article, we’ll share everything you need to know about taxes when you sell a business.

Table of сontents:

If I sell a business, how is it taxed?

There isn’t one specific answer to this question – it’s directly connected to the ownership structure of your Amazon FBA brand and the terms of the deal you make with the buyer.

It depends on whether you’re a sole proprietor, partner, or a member of an S-Corporation. If you belong to one of these groups, you should consider the overall tax costs on your individual income tax. The ordinary income from the sale of your Amazon FBA business can make you accountable for other income tax brackets. This means that you’ll need to pay a higher tax rate, besides the one based on the sale.

Another thing to consider is the deal you make, known as the Asset Allocation Agreement. This agreement defines how the various assets will be classified in the tax reporting procedures. The options are ordinary income, capital gains, or a combination of them. For the seller, the best option is to get the majority of the price allocated as capital assets. This is because the capital gain is under a lower tax rate.

What is a capital asset?

Almost everything that you own counts as a capital asset. It’s a property that should generate a certain amount of value for you, over an extended period. From a tax perspective, this refers to all the property that a taxpayer has, excluding the inventory and accounts receivable.

Your Amazon FBA brand cannot be sold solely as a capital asset – businesses aren’t sold as one asset. Your business is a combination of different tangible and intangible assets, and different tax terms can be applied to some of them.

What is the difference between capital gain and capital loss?

Before we look at different taxes when selling a business, let’s take a closer look at the eventual capital gain or loss.

Capital gain refers to the profit you earn from selling your property. A capital gain occurs if the selling price of the asset is higher than the purchase (cost) price. But, if the purchase price is higher than the selling price, this will be classified as a capital loss.

For a successful deal, ensure you pay attention to the capital gains on selling a business. Make sure you always have this equation in mind:

Gain/Loss = Total consideration of assets – basis (cost of acquisition + cost of improvements).

Taxes referred to the ordinary income

There are many tax implications when selling a business – the ideal option is to set a deal where the larger part of the sale price is allocated to capital assets. But some assets must be classified as non-capital assets. For example, stock in trade, inventory, depreciable and real property used in your trade or business, a patent or copyright, are all on the list.

When we’re talking about these types of assets, there are a few progressive tax rates that you should be aware of:

  • 10% for income up to $9,950
  • 12% for income over $9,950
  • 22% for income over $40,525
  • 24% for income over $86,375
  • 32% for income over $164,925
  • 35% for income over $209,425
  • 37% for income over $523,600

Taxes for C-Corporations

When it comes to sellers from C-Corporations, the option for capital gain tax rates is not available. In most cases, C-Corporations need to pay two kinds of taxes that are significantly higher. Both federal and state income taxes should be covered.

This means that a sole proprietorship or partnership is a far better option for both owning and selling your Amazon FBA business.

Consequences of Non-Payment

There are many tax consequences of selling a business, but far more if you avoid paying them.

First of all, you’ll start getting more calls from the IRS. They’ll try to push you to make the payment before taking more rigorous measures. If you don’t respond, the IRS Automated Collection System will be activated. The next step is charging you interest on your tax bill, which is currently set at 5% annually – and 0.5% per month on your unpaid tax balance will be payable too.

Key takeaway

Setting the right price and gaining the best profit possible can be tricky. Every Amazon FBA seller has a unique situation, so the best option is tailored guidance. Having an expert in this field can make or break your entire deal.

Why not Contact Us, to discuss your options and find out more about selling your business.

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