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Financial Planning
Jun 2024

Selling Your Business: A Guide to Tax Efficiency

By Alex Black, CFP®

So, you’re selling your business! High fives all around! Building a successful company is no small feat, and this sale marks a major accomplishment. Amidst the celebration, a growing thought claws at the back of your mind, “what is this going to do to my taxes?”

Fear not, intrepid entrepreneur! While taxes are a part of most every successful capital transaction, you can equip yourself with the knowledge to navigate the related tax implications, and the questions to discuss with your tax advisor. Consider this a roadmap of considerations to help optimize your after-tax profits, and to leave the business-world on a high note!

Pre-Sale Planning: Proactive Measures for Tax Efficiency

Planning before you even list your business for sale can significantly affect your after-tax proceeds. Here are some key strategies to consider:

  • Section 1202 Exclusion: Qualifying small business stockholders may benefit from a partial, or even full, exclusion of capital gains from taxation under Section 1202 upon the sale of the business. The eligibility requirements are specific, and there are strict rules around timing. This is an advanced tax planning strategy and will likely require support from a tax attorney.
  • Fractionalized Ownership: Restructuring your ownership to include family or key employees can be a way to spread the tax burden and create gifting opportunities. It is best to also consult with an attorney, as you explore the feasibility of this strategy as there are legal ramifications to consider with this as well. In this instance however, the strategy to reduce taxes also reduces the expected payout to the owner. Thus, one should consider this strategy in the context of a gifting plan.
  • Residency Planning: In some cases, changing your residency or the domicile of your business can create tax advantages. However, residency laws are complex and vary by state. A tax advisor specializing in residency planning can assess your situation and advise on the potential benefits and drawbacks of this strategy.


Time of Sale Planning: Structuring the Transaction for Tax Savings

The structure of the sale itself offers opportunities to optimize your tax liability, primarily in the ability to extend the timeline of the transaction. Let’s explore some options:

  • Installment Sales: Structuring the sale to receive payments over time, called an installment sale, can spread out your tax liability across multiple tax years. This can be achieved through seller financing or with annuities. You also must consider the financial situation of the counterparty; a bird in the hand may be worth two in the bush.
  • Splitting the Sale across Two Tax Years: Depending on the sale’s nature, you might be able to split the proceeds across two tax years to avoid exceeding tax brackets. The timing of a sale can have a meaningful impact, because in December a few weeks can mean the difference between one tax year and the next.
  • Rollover Equity: When selling your business you may be given an opportunity to retain shares or equity. Maintained shares or equity are typically not taxed upon sale since you are still retaining that ownership interest, and the risk that comes with it. This may be particularly appealing if the purchaser is projecting business growth after the sale. It is also a strong way to unify your incentives with that of the buyer. A win-win!
  • 1031 Exchanges: A 1031 exchange allows you to defer capital gains taxes by reinvesting sale proceeds into similar (like-kind) property of equal or greater value. This strategy has specific rules and deadlines, so consulting with a tax advisor is essential.
  • Charitable Remainder or Lead Trusts: If property is at stake in the transaction or even rollover equity, an alternative to selling, may be establishing a charitable trust and donating the retained interest. This would allow the seller to receive income or a lump sum payment while also benefiting your favorite charity, and receiving a tax deduction. Consulting with an estate planning attorney can help you explore if a charitable trust aligns with your philanthropic goals and tax objectives.


Post-Sale Planning: Strategies for Tax-Advantaged Wealth Management

Even after the sale, you can utilize tax-advantaged tools to manage your windfall:

  • 1045 Exchanges: A 1045 exchange is specific to an individual that has an equity stake in a qualified small business (QSBS) and wants to rollover all or a portion of their equity share into another QSBS to continue qualified small business treatment. This strategy can be particularly appealing as there is a time element to avoid gains through the section 1202 strategy, and a 1045 exchange can help a business owner reach the required holding period.
  • Opportunity Zones: You can invest the reported gain from a business sale into a Qualified Opportunity Fund (QOF) located in a designated Opportunity Zone, and thereby defer your capital gains for a short period. Opportunity Zones, as the name implies, encourage investment in needier communities where there are more opportunities to have a big impact. Legislation in the next two years may extend the shelf life of Opportunity Zones, which could create a larger tax incentive, or even tax-free treatment of transferred property.

Remember, this is a general overview, and the best strategy for you will depend on your unique circumstances. It takes a team of financial professionals to plan around your specific situation, but the impact can be immense. Consider working with a qualified tax advisor, estate planner, transaction specialist, and financial planner to create a personalized plan that optimizes your after-tax proceeds and secures a solid financial future.

The information provided herein is for educational purposes only, and should not be construed as advice, including, but not limited to tax, legal, insurance, investment, or retirement advice. For your specific planning needs, please seek the advice of Integris Wealth Management, your tax accountant, attorney, insurance agent, or other professional as appropriate. Investing involves the risk of loss.

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