You’ve worked hard during the last few decades building and maintaining your business, and now it’s time to sell it off, relax and enjoy the fruits of your labors. You don’t want those years of work going up in smoke through long term capital gains taxes on the sale, though. What’s a business owner to do?
You will be subject to a capital gains tax rate of, currently, 0%, 15% and 20, (depending on income) if your business is older than 12 months. Plus, assets, like inventory or accounts receivable will be taxed as ordinary income rather than capital gains. Here are options for lowering the long-term capital gains tax:
- Installment Sale: Sell in phases through a schedule of annual payments to spread out your tax liability. This strategy can also prove attractive to a buyer.
- Strategic Planning and Negotiation: You and your buyer have competing interests. The IRS rules favor allocating more of the price to capital assets rather than depreciating assets so take the time to plan most favorable allocation.
- Tax Loss Creation: Consider strategies, investment vehicles and financial structures that will create tax losses to offset the capital gain. Also consider any potential losses that can be generated by current assets.
- Entity Structuring and Shifting: Collaborate with a tax advisor and attorney to explore moving the business into another entity structure that can create charitable tax deductions or deferrals of income before the sale.
- Employee Buy-out: C-Corp owners may have the option to bypass finding a buyer, selling the business to employees and. and thereby minimizing capital gains tax. This requires an employee stock ownership plan (ESOP). Sale proceeds can be rolled into an investment plan to defer capital gains taxes.
- Explore Opportunity Zone reinvestment. Business owners can defer capital gains through December 31, 2026, by reinvesting capital gains from the sale of a business into an Opportunity Zone if reinvested within 180 days of the sale. To qualify for this tax break, any capital gains must be reinvested within 180 days of the sale. This enables deferred payment.
*Learn More! Checkout EP 038 – Strategic Business Expansion, Capital Gains & Exit Planning with Austin Peterson where we discuss structuring businesses for future capital gains events, and leveraging qualified opportunity zones.
Exceptional results require exceptional skill and planning. We can help. You’re welcome to take advantage of a free discovery session, which starts with an intro call HERE