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When you sell your business, there are multiple ways you might structure the transaction. For example, you may structure the transaction as a stock/equity sale, where you sell your stock or other ownership interest in the business entity to a buyer. Alternatively, you could structure it as an asset sale, selling all
or substantially all of the business’s assets to a buyer.
Unfortunately, although you have worked hard to build wealth through your business, you may lose part of that wealth through taxes imposed on the sale of the business. As a result, many business owners need experienced legal counsel to help them evaluate strategies to minimize the tax liability from a business sale and preserve more of the wealth they’ve built.
Turn to the legal team at 453 Deferred Sales Trust Powered by Pennington Law for the advice and assistance you need to guide you through the tax implications of a business sale. Our national law practice includes a team of highly experienced legal and financial professionals with in-depth knowledge across a broad base of issues, including the following:
- Tax law
- Asset protection
- Financial advisory services
- Wealth and fiduciary matters
- Estate and trust planning
- Irrevocable trusts
- Professional third-party trustee duties
- Financial reinvestment
- Insurance
Our extensive work helping business owners manage tax liability from asset sales has earned us various recognitions, including being named the Best Deferred Sales Trust Law Firm in the U.S. of 2024. Contact 453 Deferred Sales Trust Powered by Pennington Law today for a free initial consultation. We’ll help you discover tax-efficient strategies for selling a business that can help you keep and pass on more of the wealth you’ve created for yourself and your family.
What Tax Liability Could I Face if I Sell My Business?
A business owner may incur various tax liabilities when selling a business.
First, selling stock or equity in a business or selling a business via an asset purchase agreement that sells all or substantially all of the business’s assets may incur capital gains taxes. A party may incur capital gains taxes if they sell capital assets, such as stock, real estate, or capital equipment, that have increased in value during ownership. For example, suppose a business owner grows the value of their business by $10 million during their ownership. In that case, they may incur a capital gains tax liability on that $10 million.
In most cases, a business owner will incur long-term capital gains taxes on selling a business. The IRS imposes a 15 percent tax rate on long-term capital gains, although high-income taxpayers may have to pay a 20 percent long-term capital gains tax. Furthermore, selling Section 1202 qualified small business stock may trigger a tax rate of up to 28 percent on the taxable portion of the gain from the sale.
Business owners who sell their companies may also incur income tax liability for certain aspects of the sale, such as when an owner agrees to provide consulting services as part of the ownership transition.
Finally, selling a business may trigger various state or local taxes, as state and local governments may tax capital gains or real estate sales.
What Tax-Efficient Strategies Can I Use for Selling My Business?
The following are some of the most commonly used strategies for tax minimization when selling a
business.
Like-Kind Exchanges
IRS rules allow owners of certain types of businesses (usually real estate businesses) to conduct a sale through a like-kind exchange, which allows an asset owner to use the proceeds from selling their asset to fund the purchase of a “like-kind” asset (an asset of a similar type with an equal or greater value) while avoiding paying capital gains taxes on the asset sale.
Gifting Business to Family Members
Using gifting or estate tax planning strategies to transfer a business to family members can help owners minimize their tax burden from the transfer. A business owner can gift or bequeath shares in their company through an estate plan. By leaving company shares to family members through a will or testamentary trust, beneficiaries may take a stepped-up basis in the company, potentially minimizing their capital gains taxes if they choose to sell the business. However, gifting a business to family members means they adopt the original owner’s cost basis.
Alternatively, business owners may pass their companies through other legal structures, such as family limited partnerships. However, business owners should remember annual and lifetime gift/estate tax exclusions when gifting or bequeathing business interests, since high-value businesses can deplete a business owner’s exemptions and expose them to gift or estate taxes.
Post-Transaction Charitable Gifts
A business owner may use charitable giving to mitigate the tax consequences of selling their company. A charitable giving strategy may involve donating to tax-exempt charities to take deductions on those donations. Alternatively, a business owner might transfer their company to a charitable trust. Business owners can utilize one of two types of charitable trusts: charitable lead and charitable remainder trusts.
With a charitable lead trust, the trust pays an annuity to one or more designated philanthropic organizations from selling the business or from dividends/distributions paid by the company. At the end of the annuity term, any value left in the trust passes to non-charitable beneficiaries designated by the business owner who created the trust (such as the owner’s descendants). A charitable lead trust can allow a business owner to take an immediate income tax deduction while allowing the owner’s beneficiaries to receive the growth in value of the remainder interest-free of gift or estate taxes.
With a charitable remainder trust, the business owner receives income from the trust after transferring the business or its assets to the trust. The trust distributes its remaining assets to designated charitable beneficiaries after a specific period (such as at the end of the business owner’s life). Charitable remainder trusts can also help mitigate capital gains taxes while receiving a charitable deduction for tax purposes.
1031 Exchange
If your business owns real estate, you might use a 1031 exchange to avoid paying capital gains taxes when selling the property as part of an asset sale of the company. A 1031 exchange excuses a property owner from capital gains tax when they sell property through like-kind exchanges. In a 1031 exchange, a property owner sells real estate for business/trade or investment purposes through a qualified intermediary. The intermediary holds the sale proceeds while the business owner identifies and uses the proceeds to purchase a “like-kind” property. Most types of real estate interests will meet the “like-kind” requirement if the new property equals or exceeds the value of the sold property.
A successful 1031 exchange means the property owner will not pay capital gains taxes on selling their old property. However, 1031 exchanges have strict timing rules that require the property owner to identify and purchase a new property. Failing to meet the timing requirements will cause the 1031 exchange to fail and require the property owner to pay capital gains taxes unless they can use another legal strategy.
IRC 453/453 Deferred Sales Trust
Business owners may complete a business sale through a deferred sales trust, which takes advantage of the installment sales taxation method under IRC 453. With a deferred sales trust — which our law firm likes to call “The Tax Tool You Didn’t Know You Had” — a business owner can transfer the business to a trust managed by a bona fide third-party trustee. In exchange, the business owner receives a contract that outlines how the trust must distribute the proceeds from selling the business to the owner.
The trust sells the business to the ultimate purchaser and holds the sale proceeds; the trust may reinvest the proceeds and pay income generated to the former business owner or other beneficiaries. The business owner pays no capital gains tax on the sale until they receive distributions of the sale proceeds. Thus, a deferred sales trust can enable a business owner to spread out the capital gains tax burden from selling their business over several years.
How Can a Lawyer from 453 Deferred Sales Trust Powered by Pennington Law Help?
An experienced attorney from 453 Deferred Sales Trust Powered by Pennington Law can guide you through your legal options for managing taxes from selling a business, by doing the following:
- Thoroughly reviewing your business’s structure and financial circumstances
- Sitting down with you to discuss your financial needs, concerns, and objectives
- Evaluating legal strategies to minimize taxes on a business sale and walking you through your options to help you make informed decisions about how to proceed with a sale
- Working with other members of your team to structure the sale appropriately to secure the Intended tax benefits of your chosen strategy
Contact Our 453 Deferred Sales Trust Lawyers Today
Before selling a business, you should talk with an experienced attorney about your legal options for mitigating the tax consequences of the sale to make sure you structure the transaction correctly. Contact 453 Deferred Sales Trust Powered by Pennington Law today for a free, no-obligation consultation with our deferred sales trust lawyers to learn how we can help you minimize tax liability from selling your company.
