Know Your Tax Obligations Before Exiting Your Cafe Business
Exiting a cafe or coffee shop business can be a complex process, and it’s important to understand the tax implications of your exit strategy.
Taxes can have a significant impact on the value of your business and on the amount of money you’ll receive when you sell or transfer ownership. By understanding the tax implications of exiting your cafe or coffee shop business, you can better plan for your financial future and maximise the value of your business.
Implications of Local Tax Laws
It is important to note, that tax laws are different right around the world, so advice about what works in one place, may not be right somewhere else.
In Australia for example, the Australian Tax Office (ATO) pays a lot of attention to changes in businesses. Whether you are simply “closing down” your cafe business, selling it or handing it over to a family member, Capital Gains Tax (CGT) is the primary tax obligation you will need to be aware of when you exit your business; even if you are shutting down the business.
In England, HM Revenue and Customs (HMRC) requires changes to the status of your business to be reported, with TUPE protection and employees’ rights being an important part of the process.
In America, Internal Revenue Service (IRS) consider inventory of stock a taxable asset that must be accounted for when a business is sold. Employee tip income must also be reported 8027 as part of your business exit.
Tax Implications to Consider When Exiting your Coffee Shop Business
In most places there are several different types of taxes and obligations to consider when exiting your cafe or coffee shop business.
Capital Gains Tax
Capital gains tax is generally a tax on the profit you make when you sell an asset, in this case it’s your business – your cafe or coffee shop.
Capital gains tax is typically calculated as the difference between the sale price of the asset and its cost (usually the purchase price). The cost may be adjusted for any improvements you’ve made to the asset, such as renovations or equipment purchases during your time of ownership.
- In Australia – https://www.ato.gov.au/Individuals/Capital-gains-tax/What-is-capital-gains-tax-/
- In England – https://www.gov.uk/capital-gains-tax-businesses
- In America – https://www.irs.gov/taxtopics/tc409
There are other taxes that can apply, and they vary from place to place. To find out how they impact on you, will require a little research.
Depreciation tax: If you’ve claimed depreciation deductions on your cafe or coffee shop business, you will no longer have this benefit after exiting your business which may have an impact on your personal financial position.
Depreciation recapture: If you’ve claimed depreciation deductions on your cafe or coffee shop business, you may be subject to depreciation recapture tax when you sell the business. Depreciation recapture tax is a tax on the portion of the sale price that exceeds the adjusted basis (the original cost minus any depreciation deductions).
Estate tax: If you’re transferring ownership of your cafe or coffee shop business to your heirs, you may be subject to estate tax. Estate tax is a tax on the value of your assets at the time of your death, and it’s typically paid by the estate.
Gift tax: If you’re transferring ownership of your cafe or coffee shop business to a family member or friend while you’re still alive, you may be subject to gift tax. Gift tax is a tax on the value of the gift, and it’s typically paid by the donor.
Taxable earnouts: An Earnout may be applied to the sale of your cafe business, where the seller (or buyer) may request additional payments based on future performance of the business. Earnouts can attract taxes depending on what part of the world your business is in.
Income tax: If you receive any assets as part of your exit from your cafe or coffee shop business, such as cash, equipment, or inventory, you may need to check whether these are considered taxable assets by your government taxation agency. If they are, then income tax on the value of these assets may be applied.
Reducing Your Tax Liability
There are a number of strategies you can use to reduce your tax liability when exiting your cafe or coffee shop business.
However, it is important to note, that exiting a cafe or coffee shop business can be a complex process, and it’s best to seek the advice of a tax professional to ensure you’re making the best decisions for your situation. A tax professional can help you understand the tax implications of your exit strategy and suggest strategies to reduce your tax liability as they apply to your local taxation laws.
In most places there are options for deferring taxes –
- In Australia, you may be able to defer all of part of a capital gain for two years with a “small business rollover”.
- In England, you may be able to delay paying capital gains tax with “business asset rollover relief”.
- In America, you can defer taxes by using a 1031 exchange, also known as a like-kind exchange. With a 1031 exchange, you can sell your cafe or coffee shop business and reinvest the proceeds into a new business or investment property. By reinvesting the proceeds, you can defer paying capital gains tax until you sell the new property.
In Australia there are 3 additional types of concessions that can reduce the amount of Capital Gains Tax to be paid when selling your cafe business.
Other Strategies for Tax Minimisation
There are may be other strategies for tax minimisation when exiting your business available within your location, such as –
Tax-advantaged retirement accounts: If you’re planning to retire after exiting your cafe or coffee shop business, you may be able to use tax-advantaged retirement accounts to reduce your tax liability. Contributions to these accounts are tax-deductible, and earnings grow tax-free until withdrawal.
Sell to employees: If you’re planning to transfer ownership of your cafe or coffee shop business to an employee, you may be able to reduce your tax liability by structuring the sale as a gift or a sale at a discounted price.
Use a legal entity: A family limited partnership (FLP) is a legal entity that can be used to transfer ownership of a business to family members. By transferring ownership through an FLP, you may be able to reduce your tax liability by taking advantage of discounts for lack of marketability and lack of control. In your jurisdiction there may be alternative entities such as Trusts or Foundations that can help minimise tax when you exit your business.
Local Professional Taxation Advice
Exiting a cafe or coffee shop business can have significant tax implications, and it’s important to understand what the tax implications are for your chosen exit strategy. By considering the types of taxes you may be subject to, and using strategies to reduce your tax liability, you can better plan for your financial future and maximise the value you built up in your coffee shop business.
Remember, exiting a business is a complex process, and it’s important to seek the advice of a tax professional to ensure you’re making the best decisions for your situation.