cut Capital Gains Tax in the Sale of a firm
Hopefully, before selling a business, you meet with a Cpa or tax accountant and get an estimation on how much of your proceeds will be going directly to Uncle Sam if you pay them in a lump sum at time of sale. You don't want to save this surprise for after all is said and done, because not only will it most likely be a shock, but you will have given up your opportunity to do anything about it.
cut Capital Gains Tax in the Sale of a firm
Planning is everything. For this report I will assume you are not doing a 1031 business exchange, that is selling your business and buying an additional one similar business taking into consideration all the Irs guidelines and timelines. It's pretty rare to see this, but it can defer all of your capital gains tax if done correctly. A 1031 change is more ordinarily implemented with real estate.
Depending on how the business is sold, the gains may be taxed as long term capital gain, short term capital gain, commonplace income, etc. And if you are selling an asset in a C-Corp you may face double taxation. So, the idea is to minimize your tax bill and maximize your proceeds no matter what situation you are in.
One choice is with a Self Directed Installment Sale. The structure must be in place before the buy/sell business transaction is signed. The gist is to receive the sale proceeds in installments and only pay capital gains tax as you receive the income. This has the ensue of allowing the majority of money you would have paid immediately in taxes to continue earning compounded interest for you for many years, thus increasing your bottom line by a critical amount.
The details are a bit too complicated to fully figure in a short article, but both an Llc and a Trust are created for you and set up meet Irs criteria for suitable taxation of installment sales. Your asset gets transferred to the Llc prior to sale, and your buyer purchases from your Llc. The trust buys the shares of your Llc from you via an installment business transaction and you pay taxes on your gain only as you receive the payments.
You, the seller, are able to operate when the payments begin and how long they will be spread out. This allows for maximum flexibility to operate your income, and plan for time to come tax savings as well. Since your buyer paid cash in change for your property, you are not dependent on them to make the installment payments and you have transferred the risk of refinance or default. This is done by using an independent third party administrator and your money is safely invested in a principle protected assurance stock to be used solely for the purpose of paying the installments.
If you pass on before receiving all of the payments due, the remainder of the installment payments pass to the beneficiaries of your choice.
Seeing an example of a taxed sale vs. A Self Directed Installment Sale side by side will show you how much of a dissimilarity in comprehensive return this strategy will provide. This can make the process of the sale more palatable and provide a reliable earnings stream for retirement.
The tax benefit of this advent is similar to your 401K or Ira account. You sacrifice your current earnings by the estimate of your every year contribution and thus defer the tax you would have paid on that earnings amount. Those funds are invested in stocks and bonds and grow in value, sometimes dramatically, for the period before you retire and start taking distributions. When you start distributions, the estimate is treated as commonplace earnings and you are taxed at your much lower (you are no longer working and earning a big salary) earnings tax rate at the time.
The Self Directed Installment Sale allows you to similarly defer your capital gains tax from the sale of your business. Instead of paying all of your capital gains at time of sale, you set up your Sdis to pay out your sale proceeds over time. If you pay all of your capital gains tax at time of sale, that money is gone forever. However, with this vehicle, you spread your receipt of the sales proceeds out over, 15 years for example. When you receive your distribution, you are then taxed for the measure of that distribution that is attributed to the capital gains - ordinarily about 15%.
The dissimilarity in after tax proceeds are dramatic and are demonstrated by a complicated analysis called an illustration. I will try in an abbreviated fashion, however, to demonstrate the inherent impact. If you sold your business and you had a capital gain of .46 million, your lump sum capital gains tax cost at a 15% rate would be 9,000. In the Sdis you would keep the whole sale proceeds of .46 million and take distributions over a 20 year period or anything period you chose. You receive an every year cost over 20 years, that would consist of 1/20 of the principal, 1/20 of the capital gains, plus speculation returns.
If we did an illustration of this case and compared selling the business and paying all the capital gains up front and invested the remaining proceeds in a 6.85% aggregate growth folder versus the Sdis paying 1/20 of the capital gains annually, you would gain an 1,000 benefit in after tax proceeds. Not to bad for a minute developed planning.
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