Rather than the price sellers want to maximize what they have in their pocket after the sale of the business. For this tax optimization is key. To capitalize on the best tax strategies when selling a business, an owner needs to consult with seasoned accounting and legal professionals with the coordination of the M&A advisor. Our team has compiled expert advice relative to the two main tax structures in the sale of a business. That is, the shares of a corporation and the assets of the business. Tax considerations and lead times are different for each option.
Use the capital gain tax-free: The profit earned, or capital gain, is the difference between the cost of the shares and the sales proceeds. This is how tax debt is determined. Business owners can minimize taxes by taking advantage of the lifetime capital gain exemption of up to $892k. And, with smart planning and making sure that the business meets certain specifications, share owners can potentially receive the capital gain tax-free.
Save potentially significant tax: Potentially significant tax could also be saved by making some business adjustments. First, remove any excess cash, portfolio investments and investment properties not being used in the active business. Then, boost the tax exemption by transferring shares to a spouse or children (via a trust) to take advantage of the lifetime capital gain exemption.
Sellers vs. buyers:
In deal negotiations, sellers and buyers have different objectives. The seller wants to sell shares for tax-free capital gains. The buyer, on the other hand, wants to buy assets to get the accelerated asset values while also avoiding liabilities related to past business activities. For this reason, it is beneficial to have a M&A Advisor to handle the deal.
Business owners should employ the help of both an accountant and tax lawyer when planning a business sale. However, even before the sale, if you own shares of a small business, it is wise to conduct an annual review with your finance team to ensure that you are in compliance with the capital gain exemption requirements. This planning will also help to minimize the tax burden in case of death.
With an asset sale, there are ways that both the seller and the buyer can enjoy tax savings or tax deferrals. This includes strategies such as the buyer purchasing the assets in two different years thus splitting the capital gains and minimizing the tax burden for the seller. The existence of significant eligible capital property, or goodwill, can benefit both the seller and purchaser in an asset sale. That said, the purchaser could also pay more for the assets to offset the increased tax costs to the seller. The seller too could enjoy a small or moderate tax savings or deferral when there are eligible small business deductions. All of these strategies should be discussed with an accountant or tax lawyer to see if it is doable.
Contact the Mergex team to learn about the best strategies.