We’re in the process of selling our business (it’s a single-member LLC, taxed as an S-Corp), and we’re doing it as a Membership Interest Sale (according to our lawyer). We’re financing the buyer ourselves, with a 20% down payment coming on January 1, 2025, and monthly payments for six years, with a final balloon payment after 9.5 years.
Our local CPA says we’ll have to pay taxes on the full sale price in 2025, even though we won’t get all that cash upfront. Does this sound right, or is there a way to avoid paying so much in taxes at once? The sale price is $300K, with $60K as a down payment, but he’s saying a lot of that down payment will go to taxes. We have it set up as $50K in assets and $250K in goodwill, but we could adjust that since the paperwork isn’t signed yet.
Jael said:
Not sure why you wouldn’t be able to classify this as an installment sale with the info given, but I’d need more details to be certain.
That’s what I was thinking too, but from what I read, goodwill might not qualify for an installment sale. Any specific questions you think I should ask?
@Ellis
Are you planning to close the business after the sale? And is the loan agreement directly between you personally and the buyer, or is it between your business and the buyer?
@Ellis
Also, just to clarify, a membership interest sale is usually for partnerships. An S-Corp typically involves a stock sale or asset sale. If you’re dividing the sale price, it sounds more like an asset sale or a stock sale with a 338 election. I highly recommend consulting another CPA who’s experienced in these kinds of deals so you don’t end up losing money in taxes.
There are two transactions here: you’re selling the business and providing a loan. The sale itself is finalized once ownership transfers, and at that point, you recognize the full sale amount as income.
Then, you’re loaning the buyer the sale amount, which they pay back over time. This is a separate transaction. And make sure you’re charging interest on that loan.
@Denim
Yes, that makes sense, thanks! Just feels odd to report $300K in income when we’re only getting $60K plus $2,500 monthly payments. It’s even affecting our health insurance options since, on paper, it looks like we’re bringing in way more than we actually are. Is there another way to set this up? I thought about installment sales, but I’m not sure why the CPA didn’t bring it up. Maybe because goodwill doesn’t qualify? Feeling a bit stuck here!
@Ellis
You could sell your LLC membership interest gradually, like a portion with each payment. But that would mean staying an owner for a while, which could get complicated since you’d still have rights to profits as part-owner.
Definitely ask your CPA about this—I’m not a tax expert, so there might be other options I’m unaware of.
Ben said: @Ellis
Got it. So are you selling shares or the actual business assets?
We were initially told it’s a “stock sale,” with the sale broken down as $50K in assets and $250K in goodwill. A new attorney told us it’s actually a “membership interest sale.” I’m not entirely sure about the differences. This is a tour guide business with gear, vehicles, and a strong reputation. We can’t do an “asset sale” because our land permits can’t be sold separately, so it’s more like a “buying everything in one” setup. Hope that clarifies!
I’m not a CPA or accountant, but you might be able to structure this as an installment sale and spread the capital gains over time (and get interest income on the loan, too).
I’d suggest finding an accountant who really understands installment sales. I’ve only done this with rental properties I financed myself, but your setup might work similarly.