Selling your business isn’t just about the business. That takes center stage of course, but it’s also just as much about you, the owner, and how financially prepared you’ll be in the next phase of your life. That’s where modeling the sale of your business and the impact it will have on your income tax and cash flow becomes critical.
Preparing for the Income Tax Consequences of Selling Your Business
An income tax projection will be key. Pragmatically, a projection will not only highlight the impact of all additional ordinary income and capital gains resulting from the sale, but it will also assist with scheduling out when tax payments will be due.
Additionally, a tax projection sets the baseline for further income tax planning that can proactively benefit your tax situation, particularly in the three key areas listed below.
Income Tax Deferral
Does your deal involve the ability to earn additional purchase price related to specific company performance, such as customer retention or the payout of an escrow account? If so, some of the income tax on your gain can be deferred until the year in which you collect these additional proceeds. You would elect the installment sale method on your personal tax return and only pay tax currently on a portion of your total gain.
Income Tax Deductions
In a year with large capital gains, you have the opportunity to review your securities portfolio and realize any capital losses in your account. These losses can directly offset your capital gains giving you an immediate tax reduction. If you are still a fan of the security, you can repurchase it after a 30-day wait period so as to comply with the wash sale rules.
If you have charitable interests, the year in which you sell a business is the ideal time to consider funding more significant donations, either directly to the organizations or to a donor advised fund. The increased tax deduction will offset income in the highest tax brackets.
Future Tax Planning
In years subsequent to the sale, you will be pulling funds from taxable and tax deferred accounts to meet your cash flow needs. Future cash flow can be modeled to ensure the mix of taxable and non-taxable funds is income tax efficient and astute.
Cash Flow and Other Consequences
There are many other non-tax related items to consider after the sale of your business. Updating, or creating, a financial plan is the first step to help guide you through the many cash flow decisions to come. Whether you are looking to buy a vacation home, help your children or grandchildren with college expenses or home purchases, or fund a charitable trust to meet your charitable goals, a financial plan can become the roadmap to achieving these goals.
Hand in hand with reviewing your financial plan after the sale of your business is the valuable task of reviewing of your estate plan. Now that a large illiquid asset has been converted to a liquid asset — business to cash — you will want to review your estate plan to ensure it meets your desires for your heirs after you are gone.
Contact Alane Boffa at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.