There's no formula for figuring out how much tax you'll pay when you sell your business. The Internal Revenue Service doesn't treat a business sale as a single entity; instead, it's a combination of the sale of all your individual business assets. The taxes you pay will depend on what property your business owns.

## Capital or Ordinary Gains

The money you make from selling your business assets will be classified as either regular income or capital gains, depending on what is being sold. Profits from the sale of capital assets, such as equipment, vehicles and buildings, are taxed as capital gains or written off as a capital loss. The sale of inventory and stock on hand is treated as ordinary income. The part of the sale price classified as capital gain will be taxed at a lower rate than an equivalent amount of regular income.

## Allocation

You must use the IRS's residual method to work out how much of the purchase price is allotted to specific assets. The method divides tangible assets into five classes: cash and deposit accounts; securities, CDs and bonds; debts due and accounts receivables; inventory; and everything else. If the buyer paid \$27,000 for your business, you'd subtract the value of the cash and deposits first; then allocate the remainder to each of the other classes in order. When you've paid the fair market value for the assets in each class, move on to the next.

## Intangibles

When you've paid off all five classes of tangible assets, you move to the intangible ones. Class VI covers most intangible assets, such as:

• patents