From 24/7 Wall St. · Vilma Rios · · 1m 30s
Section 453 Lets Business Sellers Choose Tax Decade and Bracket
Business sellers can pick which tax year and bracket apply to their $5 million gain using IRS Section 453.
In brief
Business sellers can pick which tax year and bracket apply to their $5 million gain using IRS Section 453. Sellers of a $5 million business can spread tax payments over 10 years to reduce federal tax by up to $430,190. Originally reported by 24/7 Wall St..
Tax Rule for Business Sellers
Section 453 of the Internal Revenue Code lets business sellers decide which years absorb a multimillion-dollar gain.
Tax Savings Example
A married couple selling their $5 million business saves $430,190 in federal tax by spreading payments over 10 years.
How Section 453 Works
Divide your gain by the contract price to get the gross profit percentage, which determines taxable gain per payment.
Tax Bracket Impact
The lump sum payment drives $3,354,100 into the 20% tax bracket, while installments stay in the 15% bracket.
Seller Choices
Sellers can back-load payments, drive the first payment past December 31, or elect under Section 453(d) to report the gain now.
State Tax Options
Florida, Texas, Tennessee, Alaska, South Dakota, and Wyoming allow installment payments to escape state income tax after a genuine move.
Fine Print Risks
Depreciation recapture taxes the gain as ordinary income in the year of sale, and Section 453A charges interest on big notes.
Tax Planning Advice
Run payment schedules, state residency questions, and 453A thresholds with a CPA before signing a purchase agreement.
In short
Sellers of a $5 million business can spread tax payments over 10 years to reduce federal tax by up to $430,190.
