Tax Planning for the Sale of a Business

Before you commit to sell your business, you should consult with an attorney to determine whether any of the following tax planning strategies should be implemented:

 

 

  1. Non-Grantor Trust. A non-grantor trust can be used to minimize or avoid state income tax on the sale of a business. The non-grantor trust can also help defer or avoid state tax on the growth of your investments after the sale of the business.
  2. Escrow Account. IRS rulings provide a safe and simple way to defer tax and maximize income using an escrow account. This option works well for the sale of almost any type of asset or business.
  3. QSBS Planning. The tax exemption for qualified small business stock (QSBS) might be the most generous loophole in tax law history. It allows business owners to avoid all tax on the sale of stock up to a certain amount, under certain conditions. Business owners should counsel with their attorney and other tax advisors to determine whether QSBS planning is possible.
  4. Charitable Remainder Trust. By funding a charitable remainder trust prior to the sale of a business, you can avoid capital gains tax and invest 100% of the sale proceeds allocated to the trust. This means more money is working for you and providing an income stream throughout your life. The trade-off is that when you die, the assets remaining in the trust must go to charity instead of other beneficiaries. This option does not work well with an S corporation.
  5. Donor Advised Fund. By funding a donor advised fund prior to the sale of a business, you can get a “double tax benefit.” The first tax benefit is a charitable income tax deduction. The second tax benefit is the avoidance of tax on a portion of the sale proceeds because assets are being sold by a charity (the donor advised fund) instead of the taxpayer.

 

It is important to begin your tax planning early. By planning in advance, you will have more options available to you, more time to study and understand the pros and cons of each option, and the planning will be more effective and sound.

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