As business owners, we probably pay more in taxes than we’d like. Plus the rules about exemptions, regulations, fees, and taxes seem to change constantly. But with the changing tax environment comes opportunities to reduce your tax burden if you know where to look. Early planning, however, is required to make the most of this strategy.
The final installment of the Business Killers educational series shows that even successful business owners still need to navigate potentially rough seas to reach their final destination without losing too much of the value that they may have spent years to build.
The scene opens on a business owner in his early 60s meeting with an advisor. The business has successfully acquired another company and profits continue to accumulate as part of healthy business growth.
All of the growth means increased income for the owner, and with it, a significantly higher tax bill. He’s frustrated about what he perceives as a disincentive to success. And with retirement not too far away, the advisor warns him that a sale of the business will result in a much larger tax bill than the one he’s bothered about now. “Stop trying to cheer me up,” the owner half-jokes in frustration.
Having to pay taxes on money that you’ve earned may sound like a “first world problem.” And it’s certainly true that paying taxes because your business is successful is almost always better than not paying taxes because your business is losing money. But there is no reason to pay more taxes than necessary.
Tax Planning is Part of Your Exit Strategy
Tax planning is an important but sometimes overlooked part of an exit strategy. The more time you have to plan, the more likely you are to achieve the results you want. The amount of tax owed from the sale of a business depends upon whether the sale proceeds are taxed as ordinary income or capital gains. Profits from the sale of business assets likely will be taxed at capital gains rates, but money paid to an owner for transition consulting services probably will be taxed as ordinary income. And as discussed in an earlier post, the structure of the transaction (stock sale v. asset sale, allocation of purchase price, etc.) will also have consequences.
In this case, the owner isn’t stepping down tomorrow, but he won’t be working another 10 years either. For him, and for any of you who plan to sell your business, it’s not too early to begin working with your team to estimate the likely tax bite from a sale of the company and come up with a plan to fund that liability.