REPORT capital gains in a company sale

sale of business
The sale of the business is a difficult operation and difficult with many complicated aspects. Whether the complete sale of a business or just the sale of a partial interest in a business, one of the most troubling issues created by this provision is the way capital gains and other taxes are addressed. There are not many options available to a business owner, and some who come accompanied by complex rules and regulations. There are also restrictions that may increase the future risk and may trigger IRS penalties.

We are always looking for ways for our business sellers to maximize their product transactions while keeping as much as possible through the use of intelligent tax planning and structure of the transaction. I asked Dan Carroll from Brook Hollow financial explaining a unique way to defer capital gains are the result of a sale of business.

Large Tax Bill Due for sale

Capital gains, recapture and even income taxes may be levied against the proceeds from the sale of ‘business. According to the initial amount invested and how much the company has grown, these taxes can consume a large portion of the sale price. Currently, the tax on gains from the federal capital is 15%. Most states have a capital gains tax and, with the total amount often exceeding 20% ??of the gain. We believe that these rates will pressure long-term rise nearly caused by the need for the Treasury Department to compensate the shortfall of $ 800 billion that will result from the repeal of the alternative minimum tax. Other taxes, particularly if held in a “C” Corp., may exceed 60% of the transaction.

The loss of regular income

When a business is sold, the owner cash flow also stops. Therefore, the amount of money that was produced has to be replaced. Without regular income, older business owners are left with a big gap in what they receive each month and have to change plans or budgets accordingly.

What to do with the products

another major challenge that a business owner will face what to do with the proceeds of any sale. There are many ways to put this money to work for you, but it often means accepting significant risks and investing in markets without much experience. Alternatively, sellers could mitigate the risk, but only at the cost of obtaining a very low yield. Anyway, insufficient yields and potential capital loss are serious risk factors that must be considered.

The need to mitigate future risks

Among the challenges by investing new capital is that there may have different goals for the individual at this stage of his career. If the sale is motivated by a desire to move away from the management and daily responsibility, or just to cash in at a good time on the market, the owner may wish to review its objectives. A review of needs and financial expectations can be a safety requirement of the total investment. Although these alternatives exist, most do little to provide a reasonable return and can make planning more difficult with limited resources. The need and desire to mitigate future risks should play an important role in decisions about your investment plans

Traditional Business Sale -. Cash Transaction

The cash transaction option is quite simple. The seller is paid cash by the buyer. After loans or other debts are paid, the funds are then made available to the seller. At this point, the seller must pay federal and state taxes on the product, then the balance is left to invest. This significantly reduces the principle and lowers future returns. The stock market and other liquid investments involve risk of major market, and the individual may lose some or all of the money. On the other hand, the individual could place the money in a guaranteed investment, such as a certificate of deposit, but yields will be significantly delay other possible alternatives. Investing on your own requires some planning and active management of the portfolio, but more importantly, it can provide unpredictable future income required to manage and care for an investor and his family

Another approach. – The Installment Sale

An installment sale is a mechanism that has been available since the 1930s In this type of transaction, the purchaser of a company agrees to pay the seller a certain money over a specified period of time. Under this approach, the IRS ruled that only the amount of the distribution in a given year is subject to all applicable taxes to the total due. The problem here was the dependence on the buyer to continue to make the promised payments. Often, the company is poorly managed and no longer produces enough income to make the promised payments. There have always used these operations, so that if the buyer did not meet its obligation, the seller could seize and recover the property of the company. However, this offers little protection if the business has not been properly executed, or the value decreases for other reasons, because the original seller would now recover a business worth much less

improved approach -. Installment sales with guaranteed lifetime annuity payments

There is a way to ensure that these types of transactions could still be used, eliminating the possibility of default. The operation proceeds as described above, only there is a second transaction that occurs simultaneously. At the time of closing, the buyer purchases an annuity from an A + rated annuity company. Therefore, the seller receives a guarantee that whatever the future strength of the company, payments will be made as agreed, and all the benefits of tax deferral remain intact.

The advantages of this type of transaction are:

the seller is able to sell the company without future risk of
tax deferral creates much taxable equivalent yield
flexible planning allows specific plans tailored to individual future
Stabilizes income needs with certainty for life
many larger total benefit over time – guaranteed
payments can continue to pass to heirs in case of death
Eliminates the need for dear life insurance

Requires no management responsibility there is no direct expense or ongoing Expedited

closing a simple way to look at this plan is to compare it to an IRA. With the IRA your investments do grow on a tax-deferred basis for many years and you get the benefit of earning investment returns on the unpaid amount in tax. When you draw the funds from the account, then you are taxed at your then current rate. With the guaranteed annuity installment sale, you can choose to take part of the sale of the company takes place nearby and paying all appropriate taxes on that part.

You can then structure the pension guaranteed to start paying you a certain amount from 5 years for another 20 years. The investment would be authorized to increase the deferred tax for the period of 5 years. When you started to take distributions, you would be taxed at the rate you would have been from the original sales transaction. The important thing to remember here is that, instead of receiving the full distribution on closing and to pay a huge tax bill up front, you take 1 / 20th of the distribution each year and pay 1 / 20th the tax. The remaining portion of the deferred tax remains invested and earns income during the period of 20 years. This significantly increases your return on the deferred portion of the proceeds of the sale.

This mechanism is an excellent way to secure your products with guaranteed earnings, no participation or ongoing responsibility management, and favorable tax treatment. This will ensure the best possible return on a taxable equivalent compared with a fixed income, guaranteed investment. Remember in a sale of business the important number is how much you get to keep.