“There are things you can do to minimize—or with the right set of facts—eliminate taxes,” says Timothy Jessell, a tax lawyer with Greenberg Traurig in Tysons Corner, VA whose client base is people buying and selling companies. In one case, a client who is selling his consulting company will save $3.8 million in taxes “simply by filing a piece of paper,” he says.
As a business owner, it can be an especially rude shock to see so much of your hard-earned wealth snatched away in taxes when you go to sell the business.
The tax bite is a bit bigger these days, too.
So, whatever you can do to shelter the business sale from taxation can mean a world of difference for your retirement and even for the whole family. Turns out there are more than a few important tools at your disposal.
First, why is the tax bite bigger these days? The American Taxpayer Relief Act of 2012 (ATRA) befriended a new surtax added through Obamacare and this friendship brought the capital gains tax up from last year’s 15% to 20%, or even a whopping 23.8% for some earners. But wait, there’s more.
An extra provision of ATRA is set to add yet another 1.2% as of the new year. Then add state taxes. It just adds up, and that is really bad math for you.
So what are some tools and ways to lessen the tax bite? Depending on your business, your needs, and your timeline, consider three tested tools discussed in a recent Forbes article titled “Selling Your Business? 3 Ways To Cut The Tax Bite.”
While you will want to read the original article, here are the three ways:
- The ESOP Plan,
- The Qualified Small Business Stock Plan, and
- The C-to-S Corporation Conversion Plan.
Essentially, the plan (as far as capital gains taxes) is to either find a way to defer the taxation until you leave assets to your heirs (to secure the capital gains eliminating stepped-up basis), to fall under a discounted category, or to actually change the form of the business so as to skate right below that low ceiling.
There are a few more ways of doing any one or all of these steps cleanly and efficiently, especially with those with the foresight to plan well in advance.
Reference: Forbes (September 6, 2013) “Selling Your Business? 3 Ways To Cut The Tax Bite”
For more information on tax planning and estate planning, please visit my estate planning website.
