Tax Questions When Exit Planning For Your Business

Today,  Bruce and Jason Hosler of Hosler Wealth Management dive into the complexities of exit planning and tax issues related to selling a business. We kick off discussing the importance of understanding a business's structure when preparing for a sale. The structure, whether it's a sole proprietorship, partnership, LLC, S-corporation, or C-corporation, significantly impacts tax implications. We note that some business owners even change their structure before a sale for better tax treatment.

There are differences between selling business assets and selling stock. Selling assets involves transferring individual business components, while selling stock means transferring ownership of the entire entity. This choice affects tax payments and liabilities. Asset sales might allow for a step-up in basis, reducing capital gains taxes, whereas stock sales can involve fewer transactional steps.

We then explore how to determine a business's fair market value before a sale. It's industry-dependent, often involving multiples of EBITDA or gross revenues. It's important to engage a professional firm for valuation, considering factors like hiring family members or owning vehicles through the business.

Next, we delve into capital gains tax rates and their application to business sales. These rates vary based on income, with different thresholds affecting the percentage of capital gains tax. We discuss the benefits of installment sales in managing these taxes, spreading out capital gain recognition over several years.

The net investment income tax (NIIT) also comes up, a 3.8% tax on certain investment incomes, including capital gains, applicable above specific income thresholds. We touch on Section 1202, beneficial for C-corporation stockholders, potentially excluding a significant portion of gains from taxes.

We cover the concept of installment sales, useful for business sellers who don't need all the money upfront. This can keep capital gains tax at a lower rate. We also discuss deducting business expenses related to the sale, like valuation, legal fees, and brokerage commissions.

Depreciation recapture is another critical topic. When businesses sell assets like real estate or equipment, the IRS requires recapturing previously claimed depreciation, often taxed at 25%. This can be a surprise for many business owners.

State-level taxes are crucial too, as they vary widely. For instance, California has specific capital gains taxes and withholding requirements for real estate sales. We also explore selling a business to an employee stock ownership plan (ESOP), which can be tax-advantageous for both the seller and the employees.

Section 1031 exchanges are relevant for real estate assets within a business sale, allowing deferral of capital gains tax when exchanging like-kind properties. We stress the importance of due diligence in identifying potential tax liabilities before a sale and the role of careful planning in addressing employee benefits during the sale process.

Finally, we discuss the factors influencing the form of payment for a business sale, such as cash, stock, or a combination. The choice can significantly impact the sale price and the seller's financial needs.

For more information about anything related to your finances, contact Bruce Hosler and the team at Hosler Wealth Management: Visit them online at https://www.hoslerwm.com/

Or call them in their Prescott office at [phone] or their Scottsdale office at [phone].

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