Unfortunately, minimizing the tax burden of your sale isn't as simple as hiring a top-notch tax professional a few weeks before your closing. Some of the tax moves discussed below take time. So get up to speed on these tax strategies now and talk to the experts--a business broker, your accountant, a tax expert--to get your tax minimization plans in place sooner rather than later.
Tips for Minimizing Postsale Tax Liability
Regardless of whether you're selling a sole proprietorship or a corporation, it's important to understand the tax implications of the sale long before you pull the trigger on your business exit. There are several tax strategies.
- Conversion to an S corp To avoid double taxation, consider converting your C corp to an S corp prior to sale. Although restrictions may apply, by converting to an S corp, shareholders are taxed for the gain on the sale, but the corporation avoids paying corporate-level tax. This significantly reduces the total tax liability on sale proceeds. But it can't be done overnight--this conversion needs to be made 10 years prior to the sale of your business.
- An installment sale An installment sale is one of the most common tax-deferment strategies for sellers of small businesses. In an installment sale, the buyer purchases either stock or assets using an installment promissory note, committing to pay a portion of sale proceeds over time. Sellers do not permanently avoid tax on sale proceeds, but this strategy delays taxes until payments are received and helps spread out the tax burden.
- An ESOP sale Employee stock ownership plan, or ESOP, sales enable sellers to defer payment of tax on the sale of stock. As long as the ESOP owns at least 30 percent of the company’s stock postsale and the seller invests proceeds in qualified securities, it's possible to create a tax strategy that defers the payment of taxes through a managed account. This creates a permanent tax savings for your estate following your death.
- Qualified small business stock exception There is a provision in tax law that allows for an exclusion of gain from the sale of qualified small business stock, or QSBS. As of January 1, 2014, the QSBS exclusion is set at 50 percent for the sale of C corp stock in a company with total gross assets of $50 million or less. Be aware that other restrictions may apply and an AMT tax preference can further limit your tax savings. Talk with a tax professional to see if this could be an option for you.
The only thing worse than paying tax on the sale of a business is paying too much tax. Given the amount of money that changes hands in a typical business transaction, even small actions can significantly increase the size of your bank account when you exit your company. By working closely with a tax professional in the months or years leading up to the sale, you can improve your tax position and lay the groundwork for more money in the long run.