What Taxes Apply When You Sell a Business in Michigan?
Selling a business triggers multiple layers of taxation. The total bill depends on your entity type, deal structure, and how the purchase price is allocated. Here's the overview.
| Tax Type | Rate | Applies To |
|---|---|---|
| Federal Long-Term Capital Gains | 15% or 20% | Gain on goodwill, real estate, equipment held >1 year |
| Net Investment Income Tax (NIIT) | 3.8% | Investment income above $250K (married) or $200K (single) |
| Federal Ordinary Income | 10-37% | Gain on inventory, accounts receivable, non-compete allocations |
| Michigan State Income Tax | 4.25% flat | All taxable income from the sale |
| Depreciation Recapture | 25% | Gain on previously depreciated assets (Section 1245/1250) |
Real Example: Tax Impact on a $3M Michigan Business Sale
Here's a simplified example of how taxes work on a $3M asset sale for a Metro Detroit S-Corp owner.
This is a simplified illustration. Actual tax liability depends on your specific entity structure, basis, allocations, and other income. Consult a tax advisor for your specific situation.
5 Legal Strategies to Reduce Your Tax Bill
Negotiate Purchase Price Allocation
In an asset sale, how the price is allocated between goodwill, equipment, inventory, and non-compete matters enormously for taxes. More allocation to goodwill (capital gains rate) and less to non-compete (ordinary income rate) saves you money. This is a negotiation point in every deal.
Use an Installment Sale
Spreading the gain over 2-5 years can keep you in lower tax brackets and reduce or eliminate the NIIT surcharge. On a $3M sale, an installment structure could save $50K-$150K in taxes compared to receiving all proceeds in one year.
Maximize Retirement Plan Contributions
Before the sale, maximize contributions to qualified retirement plans. A defined benefit plan can allow contributions of $100K-$250K+ per year for business owners, reducing taxable income in the year of the sale.
Explore Qualified Opportunity Zones
Investing capital gains proceeds into a Qualified Opportunity Zone Fund within 180 days of the sale can defer the gain and reduce the eventual tax. If held for 10+ years, any appreciation on the QOZ investment is tax-free.
Consider Entity Restructuring (Plan Ahead)
Converting from a C-Corp to an S-Corp (with a 5-year waiting period) or restructuring your entity before the sale can significantly change your tax treatment. This requires advance planning -- another reason to start your exit planning 2-3 years out.
Know Your Numbers Before You Sell
Understanding your tax exposure before going to market prevents surprises and enables better planning. Estimate your business value, then work with a tax advisor to model your after-tax proceeds.
Business Sale Tax FAQ
What is the capital gains tax rate on selling a business in Michigan?+
Federal long-term capital gains rates are 15% for income up to $583,750 (married filing jointly) and 20% above that threshold, plus a 3.8% Net Investment Income Tax for high earners. Michigan's flat state income tax of 4.25% applies on top. Total tax on capital gains can range from 19.25% to 28.05% depending on your income level.
Is there a way to defer taxes when selling my business?+
Yes. Several strategies exist: installment sales spread the gain over multiple tax years, Qualified Small Business Stock (QSBS) exclusions can eliminate up to $10M in gains for qualifying C-Corp stock, Opportunity Zone investments can defer and reduce capital gains, and ESOP transactions for C-Corps can provide a 1042 rollover deferral.
Does it matter if I sell as an asset sale or stock sale for taxes?+
Significantly. In an asset sale, the purchase price is allocated across asset categories, each with different tax rates (ordinary income for inventory and non-competes, capital gains for goodwill). In a stock sale of a C-Corp, the entire gain is typically capital gains. S-Corp and LLC sales have pass-through treatment. The difference can be hundreds of thousands of dollars.
Should I hire a tax advisor before selling my business?+
Absolutely, and ideally 12-18 months before the sale. Pre-sale tax planning can save 5-15% of the total sale proceeds through entity restructuring, purchase price allocation strategy, installment sale structuring, and retirement plan maximization. A $50,000 investment in tax planning on a $3M sale could save $150,000-$450,000.
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