Selling the Family Business? You Have Options; Each Has Tax Implications

For me, the end goal of tax planning not just how much tax savings can be gained. It is how those tax savings can be used to benefit the client in the most meaningful ways possible. A project I had recently illustrates this real value of proactive tax planning for taxpayers.

A man contacted me wanting to sell his family farm and retire. During all his years of farming he had thought the built-up equity in his farm would provide the bulk of what he would need to fund retirement. Unfortunately, that was not the case. To simplify it quite a bit, at a sale price of $2,250,000, and after the sale costs and debt he owed were paid, he would have no amount left at all on which to retire. Worse, he would have to pull more than $600,000 “out of pocket” to pay the rest of the $1.2 million in taxes he would owe. He was deeply worried.

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Thinking About a 1031 Exchange? There is a Better Tax-Deferral Option

I spoke recently with Eugene Page, President of Optimal Real Estate, Inc., a commercial real estate brokerage firm in Los Angeles.  With more than 30 years’ experience helping investors buy and sell commercial properties, he offers unique insights into how best to sell real estate.  He gave me a synopsis of the Los Angeles marketplace which could easily be true for any major U.S. coastal market.

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Selling a Business? Get an Objective Valuation First

When a business owner decides to sell a business, the first key step to take is to get an objective assessment of the current value of the business.

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Businessman Sells Company – Keeps Taxes in His Pocket for Years

Family-owned businesses are a cherished American ideal, but it takes a commitment from multiple generations to keep such enterprises going. When the next generation “due up” decides not to step up to take over the business, the company goes up for sale. This was the case with a tax planning client of mine earlier this year. He wanted to retire from the hard, daily grind of running his manufacturing company. But none of his children wanted the business.

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The Great Sale of Baby Boomer Businesses Has Begun

 

Baby Boomers, that energetic group of people born between 1946 and 1964, are embarking on a great transfer of wealth to inheriting generations. That includes multiple trillions of dollars in boomer-owned business assets that could be passed down or sold by 2025, just nine years away. But, the 2015 US Family Business Survey by PriceWaterhouseCoopers found that only about 27% of private businesses have done any exit planning, whether to sell out or pass their interests on to a new family generation. As a tax planner, I work with many of these soon-to-retire Boomers, and I know that too many businesspeople don’t want to face the idea of retirement. Their business is their life, and the idea of giving it off to someone else is almost unthinkable!

More to the point, many of these folks have all they own tied up in the business and have no idea how to “exit on top” with a great selling price or even know what to do with the proceeds to fund a great retirement.

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Dentist Sells Practice After 30 Years – Defers Taxes Due for Decades

The sale of a long-running business usually triggers a big tax bill, and small business owners often struggle to cover that obligation. The due date on that tax bill, however, can be flexible because the tax code includes tax-deferring incentives that encourage business owners to sell more often, which “turns the assets over” and stimulates more economic growth.

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State and Local Tax Impacts on a Business Sale

Tax implications triggered by the sale of a business can get complicated when you add state-based tax codes to the mix. Depending on the state in which the business operates (or where the owner lives if an all-stock sale is contemplated), the seller may have to manage the potential for significant state income taxes on the profit from of the transaction.

These impacts may vary based on the legal structure of your business (Limited Liability Company, corporation, sole proprietor, etc.) But, here are some of the state tax ramifications on which a business seller needs advice:

  • If multiple states are involved, the location of specific assets will drive up or down the potential tax bill. Recent history plays a role here, too. A state may not appreciate last-minute moves of business operations, or of assets owned, that can be characterized as a tax-avoidance maneuver.
  • Some states do not have any long-term capital gain taxes on the books, which isn’t necessarily good news: A gain on an asset sale that qualifies as a long-term capital gain for federal purposes may be subject to ordinary income tax rates in those states. That is true for California, for example.
  • Stock sales are usually taxed in the state of residence of the selling owner, even if the company conducts its business in other states.
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Tax Loss Harvesting - Timing and Planning Are Key

As your financial advisor will tell you, whenever you have significant losses in a portfolio of assets, you have the opportunity to take advantage of tax loss harvesting.  This is a fundamental part of tax planning and is a tactic you can use to help offset taxable income or a capital gain.

The key to maximizing this benefit, though, is that other planning staple: Timing. How does this potential write-off fit into your more strategic tax planning outlook? You may have income against which to set that loss this year, but it may be a better choice to hold the loss on the books instead of cashing it in immediately. Is there a big asset sale coming in the near future that might move you into a higher tax bracket? Would the unrealized loss help reduce your tax bill if you wait to cash it in against that higher tax rate?

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