Monument Resource Center
Our clients hire us because they recognize the value of our Team’s unique, straight-forward, unfiltered opinion and our tailored advice designed to answer their questions, not everyone else’s. Below, you’ll find some of the most important questions we have been asked over the years to help you better understand the role we play and the advice we give.
As a business owner considering your exit, when you think about the question “What’s the money for?” is “paying income taxes” a high priority? Chances are you are looking for ways to minimize the amount of taxes paid on a business sale, increasing the resources available to fund the things that are higher on your list.
While taxes are one of life’s certainties, with careful advanced planning (ideally before entertaining any offers) you may find ways to reduce them.
Maximize what’s taxed at advantageous rates
Sometimes, a business sale isn’t the sale of a single “business asset”–it’s often considered the sale of the individual assets of the business (think inventory, intangibles like goodwill, capital assets, etc.) for tax purposes.
This means that some assets may be taxed as ordinary income when sold while others may be taxed at lower, advantageous long-term capital gains rates. It’s worth noting, there may be big differences between the top marginal rate for ordinary income and the top rate paid on capital gains.
We are not tax experts, but we have seen a lot. Your CPA is well suited to weigh in on these nuances. That’s why it’s important to develop a relationship with a CPA who is proactive in helping you with this strategic planning, not someone who just checks the box on completing your tax returns each year.
As part of any prospective deal, you as the seller will need to negotiate with the buyer on just how much of the purchase price is allocated to capital assets vs. assets subject to ordinary income taxes.
While the IRS has guidelines on this, often there’s some flexibility as part of the deal-making. Your CPA and deal attorney are integral to this process and it is imperative that you consult with them on the negotiations
If your business is a corporation, you may be able to sell your shares in the business in lieu of an asset sale, resulting in taxes at capital gains rates vs. ordinary income. A strategic CPA can help with choices surrounding the best legal structure for your business well in advance of any potential sale – they will deliver value by helping you minimize taxes where possible.
Consider receiving payments over time vs. lump sum
Installment sales may help provide some control over tax planning by spreading income from the transaction (and the accompanying taxes) over a number of years vs. a single year. Moreover, installment payments may help you stay in a lower tax bracket (meaning you may be able to prevent other sources of income from being taxed at higher marginal rates).
Having less taxable income in a tax year also means that you may benefit from even lower tax rates on long-term capital gains (potentially 0-15%).
Minimizing taxable income also has other benefits, including:
- Lower Medicare Part B & D premiums if you are age 63 or older
- Lower threshold for AGI-dependent deductions, like deductible medical expenses
- Reducing the likelihood of being subject to the additional 3.8% net investment income tax
Installment sales are not without risk and may not be the best solution given your unique circumstances or needs from a business sale. Keep in mind, you are depending on the ability of the buyer/new owner to make the payments they owe. Having a good understanding of “what the money’s for” and your personal needs from a business exit can help clarify this decision-making.
Consider your legacy. Does charity fit in?
In answering the question “What’s the money for?”, you may discover that you have sufficient assets to fund your desired lifetime spending and accomplish all of your other goals and priorities (gifting to family and friends, setting the next generation up for success, etc.). This may lead you to consider charitable donations.
There are various charitable giving vehicles that may be beneficial to fund as part of your exit strategy if you decide that charitable giving is a priority, including a Donor Advised Fund.
A Donor Advised Fund (DAF) allows you to make a tax-deductible donation (the fund itself is considered a 501(c)(3)), grow funds available for charitable giving by investing the donation in an allocation of your choosing, and granting money out to charities over time. Because the DAF is a charitable vehicle, earnings on investments compound tax-free – potentially supercharging your giving and creating a multi-generational charitable legacy. Donating to a DAF can reduce taxable income in a year when it is abnormally high (like having proceeds from a business exit) and pre-fund a charitable legacy, removing the worry about factoring in charitable giving from your personal portfolio in the future.
Additionally, you don’t have to donate cash from a business transaction. You could, instead, donate appreciated stocks or other assets you already own to remove future capital gains potential!
Know all options available
Reducing taxes on the sale of your business can be crucial for your financial future. And even if you’re set, it can provide extra room to gift money to friends and family, create a college fund for your grandchildren, and even donate to charity. But doing it right makes all the difference – knowing your options, making the right moves and making them early, etc. That’s why you should add us to your team of experts. Alongside a CPA, tax attorney and deal attorney, we can work to help you holistically consider all the options.
At Monument Wealth Management, we build a Private Wealth Design unique to you. This serves as a blueprint of the rest of your life, financial and otherwise, clearly laying out your goals and how to use your resources to achieve them. We’ll even present different scenarios so you can decide what’s best for you.
Our advice is unfiltered–we tell it to you straight. Your goals are our goals, and rest assured we’ll be right with you every step of the way in your financial journey. If you want advice based on YOUR best interest, let’s talk.
*Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. Please consult your CPA for tax advice.
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