Ep #087: 7 Tax-Saving Strategies for Business Owners Selling Their Company
7 Strategic Ways to Minimize Taxes When Selling Your Business
Selling your business can be a monumental decision, both emotionally and financially. Today, we dive into seven high-level strategies that can significantly impact your tax liabilities when selling your business. Understanding these can save you hundreds of thousands, if not millions, of dollars.
Strategic Tax Planning for Business Sales
1. Separating Real Estate from the Business Sale
Selling your company but retaining the real estate can provide considerable financial advantages:
- Passive Income Benefits: Income from real estate is passive and not considered earned income so it won't affect Social Security benefits if you retire early and decide to claim your benefits early. Passive income is also not subject to the self-employment tax at 15.3%.
- Long-term Security: You can continue to receive rental income and later sell the property for its appreciated value, enjoying the capital gains.
2. Leveraging Qualified Small Business Stock (Section 1202)
For C Corporation owners who qualify:
- Tax Exemption: Potentially eliminate capital gains tax on the sale of your business, with gains up to $10 million being tax-free under certain conditions.
- Eligibility Requirements: Must hold the stock for at least five years and must be a C Corp with no more than $50,000,000 in gross assets. Professional service businesses do not qualify.
3. Implementing an Installment Sale
- Tax Deferral: Spreading out the recognition of capital gains over several years to reduce the tax rate on gains, particularly effective for staying within lower tax brackets.
4. Utilizing Charitable Remainder Trusts
- Tax Advantages and Income Stream: By transferring your business stock to a charitable trust, you can receive an immediate tax deduction, defer capital gains taxes, and secure a lifetime income stream, with the remainder going to charity.
5. Investing in Qualified Opportunity Zones
- Capital Gains Deferral: Invest in designated economic areas to defer capital gains taxes until 2026 and potentially eliminate taxes on future gains from these investments if held for ten years or more.
6. Relocation to Tax-Favorable States
- State Tax Implications: Moving to a state with lower or no state income tax can save significant amounts in taxes, a strategic move to consider well before selling your business. Be careful of different states having an "exit tax." Research the tax rules for your current state and the state you are looking to relocate to.
7. Establishing an Employee Stock Ownership Plan (ESOP)
- Employee Involvement: Sell your business to your employees via an ESOP, minimizing or even avoiding capital gains taxes. Another great advantage is that you don't have to look for a buyer because the cash you receive from the sale can be rolled into an investment plan to defer capital gains tax.
These seven strategies for reducing taxes when selling your business demonstrate the importance of early and strategic exit planning. Each method has its nuances and requires careful consideration and professional advice to implement effectively. If you're contemplating how these strategies might apply to your situation or preparing for a future business transition, consider getting your detailed readiness assessment to explore your options thoroughly.
Get Your Free Readiness Assessment to discover how prepared you are for an exit, establish a transition timeline, and develop a high-value action plan.
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