I am working towards purchasing a small business I have been involved with for many years. I am applying for a 50% down SBA loan and 50% seller financed. Is the seller taxed on the total sale amount immediately or as funds are received?
We try not to provide specific tax advice in the forum because individual circumstances can vary. For answers to specific tax questions, you should really contact a licensed professional. That said, based on the situation you’ve outlined above, yes, the seller would probably need to claim the full sale price as taxable income in the year of the sale. If you’ve structured a staged sale that includes options or a buy-sell agreement, then this may not be the case. However, if you’re acquiring the seller’s full stake in the business up front, then that’s when the tax liability would be incurred.
This misalignment of tax liability and receipt of sales proceeds is part of the reason why considerable seller financing is hard to structure in private sales – and why such large down payments can be required up front.
If you’d like some insight on other things that you may want to consider when structuring the purchase or sale of a business, be sure to check out our ultimate guide to Selling a Business. You may also want to check out our guide to Valuing Businesses to read more about how some factors can affect the sales price of a business.
Hope this helps,
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