Thinking of selling your restaurant? The sale of any business comes with a myriad of tax implications, which is why it’s important to work closely with a tax professional who can help you navigate your options. Below are five key tax-related points you should consider when it comes time to sell your restaurant.
Asset Sales vs. Stock Sales
How the sale of your restaurant will be taxed depends largely on the structure of the sale. Business sales can be categorized into two main types: stock sales and asset sales.
Asset sale: In an asset sale, a buyer purchases specific assets from the seller rather than the entire business, with the seller retaining ownership of the business entity. Assets include both tangible assets—such as buildings, property, and equipment— and intangible assets, such as licenses, patents, and copyrights. The sale of some asset types results in ordinary income while the sale of others results in a capital gain; as a result, they are taxed differently.
Stock sale: A stock sale is the sale of the restaurant’s shares, which transfers ownership of the entire legal entity to the buyer. Stock sales are typically preferred by sellers for their more favorable tax treatment; proceeds from stock sales often qualify for capital gains tax rates, which are significantly lower than ordinary income tax rates.
Properly Valuing Assets and Reporting Goodwill
If selling your restaurant through an asset sale, “goodwill” refers to the amount paid by the buyer over the fair market value of the business’s net assets. To calculate goodwill, the buyer and seller must first agree on the valuation of each asset. Sellers typically prefer to allocate more to goodwill for more favorable tax treatment on their end (capital gains rate), while buyers prefer to allocate more to tangible assets that can be depreciated for immediate tax deductions. It’s essential to properly value all assets and avoid inflating goodwill to ensure accurate financial reporting, maintain stakeholder trust, and support informed decision-making.
Succession Planning
A succession plan identifies who will take over the business after you leave and enables a smooth transition of leadership upon the sale of your business. Succession planning is closely connected with tax planning, as a succession plan will determine how your restaurant’s assets will be transferred. Different methods of transferring ownership—such as selling the business to an external buyer, selling to an internal employee, selling to employees via an Employee Stock Ownership Plan (ESOP), gifting the business to a family member, or establishing a buy-sell agreement among multiple owners—all carry different tax implications.
Selling or Gifting to Family Members
If transferring ownership to a family member, you can choose to either sell the business or give it as a gift. Both methods come with their own tax implications. Selling the business will likely require you to pay capital gains tax, while gifting the business may trigger federal gift tax.
Installment Sales vs. Full Payment Upfront
When selling your restaurant, you can choose to receive the full payment upfront or structure the sale as an installment sale. A lump-sum payment provides immediate cash, but will result in a large tax liability for the entire gain for the year of the sale. An installment sale, which takes place over several years in multiple payments, allows you to spread the taxable gain out over a period of time and potentially lower your tax liability. However, not all assets qualify for installment sale tax treatment. Both sale options come with their own risks and benefits, so it is recommended that you meet with your accountant to discuss your options in greater detail.
Get in Touch With Us
For help navigating the tax implications of selling your restaurant, please don’t hesitate to reach out to our restaurant accounting professionals at RBT CPAs. Our team is here to support all of your accounting, tax, audit, and advisory needs—from the day you start your business until the day you sell it, and beyond. Give us a call to find out how we can be Remarkably Better Together.