Let’s talk about everyone’s favorite topic: TAXES! *insert eye roll here*
Disclaimer: we are not CPAs or attorneys so you should not consider this newsletter as tax or legal advice. Now that we have that out of the way…
With the recent presidential election, you might have heard about the possibility of capital gains taxes going through the roof and many sellers are having severe heartburn over what that might mean to them when they sell their business. Here is the good news: If your deal is under $500,000, you probably won’t pay any additional taxes on your deal if the proposed capital gains rates change. You could have some minor increases between $500,000 and $1,000,000, but nothing to get too upset about. Now, the folks that might end up with an adjusted gross income over $1 million…those are the folks that we need to worry about as the proposed capital gains rate for them would go from 20% to 39.6%. Ouch. Fortunately, there are some tax management and mitigation strategies for those folks too.
If your sale price is less than $1 million, we will employ all of our “regular” tax management strategies such as:
- Asset Allocation: The portion of the sale that is allocated to pre-determined categories such as furniture, fixtures, and equipment; inventory; non-compete; and goodwill.
- Seller Financing and Earn Outs: This has built-in tax deferment benefits as you don’t pay taxes on the money until you receive it.
- 1031 Exchange: It’s no longer available on personal property, but when real estate is involved, this can be a powerful strategy to use a qualified intermediary and purchase a “like-kind” property within a designated timeframe.
If your sale price is over $1 million, we have some additional tax management strategies that can end up providing major benefit to the seller:
- Deferred Sales Trust: The purchase price goes into a trust that pays out the money over time and allows the seller to stay in a particular tax bracket without a major spike.
- Monetized Installment Sale: A little more complex, but it involves working with a capital markets dealer and a lender to defer taxes 30 years into the future while receiving the proceeds from the sale now.
Both the Deferred Sales Trust and Monetized Installment Sale require specialists to handle them and there are some upfront and ongoing fees, but they can save the seller a great deal on taxes when implemented correctly.
We’re not here to give you tax or legal advice, but we are here to help connect you with the professionals you need to put more money in your pocket when you sell your business. If you want to talk about your specific situation, contact us for a complimentary consultation.