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Beware of the Tax Man

Taxation of capital gains resulting from the sale of a business can impact your retirement plans. Yet with proper planning, it is possible to significantly reduce, or even eliminate this tax.

Taxation of capital gains

For example, let’s assume that your business is sold for $3,200,000 and had a minimal cost when it was started. Prior to the sale it was solely owned by you, and you are still able to utilize your $800,000 (indexed to inflation so it is $848,252 for 2018) capital gains exemption. The result would be that the amount of $2,400,000 would be subject to tax at a rate of about 26.75%, resulting in tax payable of approximately $642,000, and net proceeds to you of $2,558,000.

However, with proper advance planning, it is possible to eliminate or significantly reduce the tax on sale. This is done by having other family members (spouse, children, or a trust for spouse and/or children) owning shares of the company which participate in the growth of the business. For example, if at the time the business was started, each of the husband, wife, and two children owned an equal number of shares, then the sale of the business for $3,200,000 would result in NO TAX (other than some minimum tax payable in the year of sale which would be refundable in subsequent years if income returns to normal levels), as each of the four shareholders would be able to utilize their individual $800,000 capital gains exemption.

“With proper advance planning, it is possible to eliminate or significantly reduce the tax on sale.”

This is the ideal scenario, but even if the ownership of the business was not structured in this way from the beginning, it is still possible to change the structure to enable future growth in value to go to the new shareholders. There is also the possibility of using a family trust to hold the growth shares on behalf of beneficiaries you choose.  For this and similarly beneficial reasons, alternative tax strategies should be considered and implemented early on, to minimize taxes at sale time.

How we can help you

When we say our approach is holistic, we mean it. It’s centered around you. Not just your company; not only your legacy, you. We advise business owners and their families both personally and professionally. Our professionals, (from wealth management, valuations, taxation and estates, to various other service lines) work collaboratively to provide advice that makes the most sense for you and your objectives – because we know that your work affects your personal life, and vice versa – they are of equal importance. Through early, comprehensive planning, our professionals assess every situation and present options to help you make informed, strategic decisions to make the most out of your unique situation.

Read more articles on business succession planning:

What its’ worth now, and how

Should I stay or should I go?

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