Tax questions to ask before you sell a billing company

We’re not tax advisers, and we could be on the other side of your sale, so take these questions to your CPA or tax attorney, ideally before you agree on a price, because the structure of a deal can change what you actually keep.

Are you selling assets or the company?

Buyers often prefer to buy assets, such as your client relationships. A 2021 HBMA article lists purchasing assets instead of stock as one way they protect themselves. Sellers may prefer to sell stock or their ownership interest. The tax result can differ, and so can what happens to the company’s liabilities.

How your company is set up matters here, whether that’s a sole proprietorship, an LLC, an S corporation or a C corporation. Ask your adviser:

• How would each kind of sale be taxed for my entity?
• If I’m a C corporation, could an asset sale be taxed twice, once in the company and again when I take the money out?

How is the price divided up?

In an asset sale, the price has to be allocated across what you sold. If goodwill or going concern value could attach to the assets, both buyer and seller generally file Form 8594 and attach it to their tax returns.

The form sorts assets into classes. Accounts receivable are in Class III, equipment and furniture generally fall in Class V, a covenant not to compete is in Class VI, and goodwill is in Class VII.

This is worth your attention, because different types of asset can be taxed differently to you, and what suits the buyer may not suit you. Agree the allocation in the purchase agreement instead of leaving it for later. Ask your adviser:

• How would each class be taxed for me?
• How much should go to a non compete, and what does that do to my tax?
• Are consulting fees for my handover work taxed differently from the purchase price?

What if you’re paid over time?

The IRS says an installment sale is a sale of property where you receive at least one payment after the tax year of the sale. The installment method may let you spread out some of the gain as you’re paid, although not every asset qualifies, and you should ask how it treats a sale of a whole business.

A revenue share or earnout raises some extra questions, since the total price isn’t known at the start:

• How is a contingent payment sale reported, and what’s assumed about the final price?
• If there’s a maximum price in the agreement, what does that change?
• What happens if clients leave and I receive less than expected?

Form 8594 has its own rule here. Its instructions say to assume that contingencies are met and the consideration paid is the highest amount possible, and to file a new form for each year in which the consideration goes up or down.

Is some of it treated as interest?

This one surprises people who choose a no interest deal. Publication 537 says that if your sale calls for payments in a later year and the contract provides for little or no interest, you may have to figure unstated interest. So part of what you receive could be taxed as interest, even though the agreement doesn’t call it that. Ask:

• Will unstated interest apply to my payments?
• How much of each payment would be treated that way?

Other things to raise

• State taxes. They vary, and may depend on where you live and where your clients are.
• Timing. Would closing in January instead of December make a difference? Does the sale affect my retirement plans or Social Security?
• Retained accounts receivable. If you keep fees that clients already owe you, how are those taxed when they come in?
• What it does to my estate. If I die during the payment period, how are the remaining payments treated?
• Records. What should I keep, and for how long?

Before your first meeting

Your adviser will want to see your entity documents, recent tax returns, your depreciation schedule and any draft of the deal. If you’ve worked out your seller’s discretionary earnings, bring that as well.

Fieldstone may be a buyer in a sale like this, so read this guide with that in mind. It's general information, and it isn't legal or tax advice.