Maximizing Your Profits: 8 Tax Planning Strategies for a Business Sale

Business sale years are often the highest income year in someone's life. This means tax deductions are worth more than they ever have before and likely ever will. Below, we will discuss how to take advantage of this tax savings opportunity and deduct, delay, and defer this income to reduce its impact on your tax bill.

1. Retirement Plans

   1. Max out qualified retirement plans and HSA accounts.

      1. Max out your 401k, Solo-k, SIMPLE IRA, SEP IRA, HSA, or IRA, depending on your company's current plan.

      2. Yes, you can max out the annual limit even if you don't work full-time for the entire year.

      3. If your spouse is an employee of the company, you can also make deductible retirement plan contributions on their behalf.

         
         

2. Donor-Advised Fund (DAF)

   1. If you are charitably inclined, consider contributing to a donor-advised fund the year of your business sale. You can read more about donor-advised funds HERE.

      1. DAFs allow you to donate an unlimited asset value in one year and sell the asset tax-free from within the DAF. You can then invest these funds and donate the assets over time while receiving the entire deduction in the first year.

      2. You can donate appreciated stock, cash, real estate, etc.

      3. Deductions are limited based on your AGI. Gifts of cash are currently limited to 60% of your AGI and gifts of appreciated stock are limited to 30% of your AGI. If you donate over this limit then the deductions not counted in that year will roll forward for five years.

      4. Stock donations must be long-term capital gains for favorable tax treatment.

      5. Ex. If your AGI was $1 million and you donated $400k in appreciated stock then only $300k would count as a deduction for this year and $100k would be rolled to next year.

         
         

3. Installment Sale

   1. Spread income over multiple years by selling the business on an installment basis.

      1. Allows you to pay taxes only on amounts received each year.

      2. Reduces exposure to higher tax brackets and improves cash flow.

      3. You could tie the sale price to future company performance, allowing you to possibly sell for higher than if you sold 100% of the company in one year.

      4. You could consider seller financing and earn an interest rate on the loan amount.

4. Cost Segregation Study

   1. If you own real estate, then consider a cost segregation study in the same year as the business sale and seek to qualify as a real estate professional to maximize deductions on improvements that year.

      1. A cost segregation study is a tax strategy used to identify and reclassify assets to maximize depreciation benefits. This study breaks down the components of property into shorter-lived assets (such as flooring, fixtures, and landscaping) versus the standard 27.5- or 39-year depreciation schedule for residential or commercial real estate, respectively. By doing so, property owners can accelerate depreciation deductions, reducing taxable income and deferring tax liabilities.

      2. You or your spouse qualifying as a real estate professional can allow you to deduct money from your real estate business against your other income sources. If no one qualifies as a RE professional then the deductions can only count against your RE income.

         
         

5. Employ Children

   1. If your children can reasonably complete valuable work, you could pay them at their lower tax bracket and possibly even save funds within a minor Roth IRA to help set them up for retirement.

      
      

6. Cash Balance Plan

   1. You can read more about Cash Balance Plans HERE.

   2. These plans typically work best for businesses with a small number of employees that have high profit margins. There's a good bit of fees and regulation surrounding these plans but it may make sense for the right person.

      
      

7. Reduce Dividend Income

   1. Dividend income can often be taxed as ordinary income. It may be worth considering investing in vehicles that are taxed at long-term capital gains rates if your income will be high for the forseeable future.

      
      

8. Pay Property Taxes From Your Company

   1. In 2017, the IRS put a limit on your state and local tax (SALT) deduction of $10,000/year. If your home property taxes are $15,000 for the year, you can only deduct $10,000 of that $15,000, leaving $5,000 to provide no deduction for you and your family. However, you can pay your property taxes through your business and realize a deduction on the entire property tax amount. As with most tax questions, more variables are at play, but that's a high-level view. You can read more about this strategy HERE, and be sure to talk with your CPA/EA before pursuing this yourself.

      
      

Summary

I hope you found one of the above strategies enlightening. Let me know if you have any questions or concerns.