When you are planning to sell your business, you also need to start strategizing your tax plans. After the sale of your business, you’ll have a large sum of money that you will want to protect from harsh taxation. The key to effective tax planning is being proactive and taking initiative. Below we discuss several ways to reduce taxes when selling your business.
1. Plan An Installment Sale
By structuring the sale of your business as an installment sale, you can minimize taxes by receiving a portion of the overall profits over time. If just one payment is received after the year of the sale, you have an installment sale. Instead of paying taxes in one year on the lump sum of profits, your profits can be spread out over time, reducing your tax liability. However, an installment sale can not be used for the sale of inventory or receivables.
2. Switch To An S Corporation
While sales of businesses can be characterized as a stock or asset sale for both C corporations and S corporations, there is an extra tax savings for S corporations. The owner of a C corporation is required to pay an additional 3.8% Medicare tax on the net investment income of the gain on the sale. Owners of S corporations do not have to pay this additional Medicare tax as long as the owner is actively involved in the business, not just a silent partner.
3. For Sole Proprietors: Negotiate, Negotiate, Negotiate
As a sole proprietor, a sale of the business is treated as each asset was sold individually, most of which can trigger capital gains taxes. However, some asset sales produce ordinary income, such as the sale of inventory. In the sale of the business, you can negotiate the terms to allot money to the purchase price based on the assets included in the sale. The IRS has an Asset Acquisition Statement, Form 8594, that shows seven asset classes that you must allocate the purchase price of the business. Allocations are negotiations; the seller will want to put more of the purchase price towards capital gains assets while the buyer wants allocations for assets that can be depreciated in the years to come. Negotiations can be stressful, but going through the process will allow you to get what you deem important in the sale of your business.
4. For A Corporation: Choose A Sale Of Stock Or Assets
If you are a corporation owner, you can structure the sale as selling stock or selling assets. Sellers typically prefer a sale of stock to limit the reporting of capital gains but buyers prefer an asset sale to have a higher basis of the depreciable assets they will receive in the sale. To resolve the structure of the sale, negotiate for your best interest.
5. Create An Employee Stock Ownership Plan (ESOP)
C corporations can utilize employee stock ownership plans to sell your business to your staff. With an ESOP, employees own the business so you don’t have to find another buyer. As the owner, you can set a reasonable price for the sale, receive cash from the ESOP, and roll the proceeds into a diversified portfolio to defer tax on the gain.
6. Create A Charitable Remainder Trust
A charitable remainder trust allows business owners to reduce their income tax liability. When the business owned by the trust is sold, the gain on the sale of assets remains tax-exempt. The trust will also provide a fixed amount of income each year to the donor or the donor’s chosen beneficiary. This is one of the best ways for business owners to shelter their proceeds from capital gains taxes.
If you are preparing to sell your business, you should have a financial advisor on your side to assist you in the process. Our experienced and knowledgeable advisors at Maven bridge Capital can walk you through the steps for a proper tax sheltering strategy when selling your business so you can enjoy your new adventures without any hassle. Schedule a consultation with us today to get started.