In addition to the three strategies I listed for you in my
clarification request posted October 15, 2005, I found these
additional ideas for you:
***************************************
Structure the Sale as a Corporate Reorganization
***************************************
Also from It's Simple.Biz:
http://www.itssimple.biz/biz_tools/text/P11_2458.html
"If your business is incorporated and you are selling out to a larger
corporation, it may be possible to defer any tax due on the sale.
How? By structuring the sale as a corporate reorganization, and
accepting the purchaser's stock in exchange for your own business's
stock. If you manage to comply with the IRS's extensive rules for
these types of transactions, you won't be taxed on the value of the
stock you receive, until you sell it at some point down the road. If
you receive other property or tax in addition, however, you'll have to
recognize taxable gain to the extent of this 'boot.' "
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Put Your Family on the Payroll
*****************************
"Tax Updates. Year-end tax planning starts now," by the CPA firm of
Clark, Schaefer, Hackett & Co., Ohio:
http://www.cshco.com/index.lasso?pgID=108&set=article&node=2
Granted, you don't have much time left to do this, but "Sole
proprietorships can realize tax savings by putting family members on
the payroll. Putting a spouse on the payroll allows the business to
provide tax-free medical coverage for the self-employed individual as
the spouse of a covered employee. Children can earn up to $5,000 tax
free, and also have the opportunity to put the funds into a Roth IRA.
The parents are also not subject to FICA on the wages paid to a child
under age 18. Those who work out of their homes can take advantage of
the liberalized rules for claiming a home office deduction, and if
they qualify, can also deduct travel costs between their homes and
where their clients are. . ."
*********************
Defer Income and Billing
*********************
From the Alabama Society of Certified Public Accountants: "Tax Law
Changes and Tax Planning Tips" (2004):
http://www.ascpa.org/newsevents/Tax%20Law%20Changes%20and%20Tax%20Planning%20Tips.htm
Under "Timing Strategies"
"One of the easiest ways to lower your tax bill is to defer income
into the next year and accelerate deductions into the current year . .
. Deferring income is easier for self-employed business owners using
cash basis accounting. Simply delay your year-end billing so that
payments won?t reach you until after the first of the year."
************************************************
Lifetime Gift Programs: Give Some of the Money to Heirs
************************************************
"Selling a Business," by "J. Arthur Urciuoli, Senior Vice President
and Director of Business Financial Services, Merrill Lynch Pierce
Fenner & Smith, Inc., New York," published at MoreBusiness:
http://www.morebusiness.com/running_your_business/financing/sell.brc
Scroll down to "The value of a valuation":
"Furthermore, you might want to consider a lifetime gift pro[gram],
transferring up to $10,000 worth of the business tax-free year to each
heir. A valuation is important since taxable are included in the
estate tax alculation at the value of gift when given; this has the
effect of potentially excluding subsequent appreciation from your
estate."
******************
Post-Sale Strategies
******************
"Entrepreneurial Personal Finance: After the Sale of Your Company," by
Richard D. Harroch, attorney and entrepreneur, AllBusiness.com, Inc.
Condensed version published at EntreWorld.org:
http://www.entreworld.org/content/EntreByline.cfm?ColumnID=653
Original, full article (albeit minus the author's byline) is at AllBusiness:
http://www.allbusiness.com/articles/PersonalFinance/3942-2419-2424.html
"Diversify Your Holdings. If you received cash from the sale,
immediately consider a diversification plan for the proceeds. Think
about a combination of mutual funds, municipal bonds, money market
accounts, and real estate. Your particular diversification plan will
depend upon the amount of proceeds, your other assets, and your age.
Think about hiring an experienced financial planner to guide you
through the process."
"Seek Capital Gains Treatment.
Capital gains on the sale of stock receive much better tax treatment
than ordinary income tax treatment. So review with your tax advisor
the types of payments you are to receive under the sale. Perhaps you
can optimize tax treatment by reconfiguring the payment. [I know you
said you don't want a consulting contract; an adviser may give you
other options.] For example, you may decide that a two-year, $200,000
consulting agreement after the sale is not as advantageous as a higher
purchase price and lower consulting payments."
Some other suggestions you'll find here: "Take a Loss on Other
Investments; Tax-Free Investments; Charitable Donations." Also, "Max
Out Your IRA or Other Retirement Plan Contributions. This is a
legitimate way to lower your taxes for the year, so make sure you have
taken advantage of IRA or other retirement plan contributions that you
are allowed to make."
"Prepay Your State and/or Local Taxes; Pay Your January 1 Mortgage
Payment Early. Establish a 529 [tax-free] College Savings Plan for
Your Children."
**************
IRS Form 4797
**************
From "SMART ANSWERS," by Karen E. Klein, Business Week Online, July 6, 2004:
Deduct the costs of your business, like the $50,000 worth of equipment
you purchased over the years, from the sale price.
". . . use IRS Form 4797 to report the sale of a business asset. Take
the price you paid as your 'cost basis' and deduct it from the sales
price. The difference, minus the return on your $60,000 investment,
represents your proceeds, which are taxed at the capital gains rate.
Continuing to use our example, if you sold the building for $350,000,
you would pay off the loan to the previous owner and be left with
$110,000 ($60,000 return on investment and $50,000 profit). You would
list that $50,000 as a capital gain and pay taxes on that amount."
Investments
**************************
HSA's: Health Savings Accounts
**************************
From the Alabama Society of Certified Public Accountants:
"Tax Law Changes and Tax Planning Tips" (2004):
http://www.ascpa.org/newsevents/Tax%20Law%20Changes%20and%20Tax%20Planning%20Tips.htm
"The HSA, which was created by the 2003 Medicare Act, is a tax-favored
savings plan. It allows individuals and employers to make deposits
that can be used to pay for qualified health expenses that the
individual, his or her spouse, or their dependents incur. The money
you contribute to an HSA is tax-deductible, even if you don?t itemize.
The interest and investment earnings are not taxable, so the money in
your HSA grows tax-free. . . ."
********************************
Individual(k) or Solo(k) 401k's
********************************
"Individual(k) or Solo(k) 401k-like Plans," by Dustin Woodard,
published at About.com:
"Up to $11,000 can be contributed,although it can't exceed 100% of
pay. There is a total salary deferral and employer maximum of $40,000.
Employer contribution limits are up to 25% of pay or 20% for
self-employed . . . . Individuals age 50 or older may contribute an
additional $1,000 in salary deferrals beyond the $11,000(this does not
count towards the maximum total contribution limit of $40,000).
***********
Keogh Plans
***********
New York Life Insurance has a good explanation of Keogh Plans:
http://www.newyorklife.com/cda/0,3254,11546,00.html
"Contributions to a Keogh are made pre-tax, which reduces your taxable
income. If you are the owner of a self-employed business, you can
generally deduct the entire amount of your yearly Keogh contribution .
. .
********
SEP IRAs
********
Here's some more information on investing to minimize taxes, from
North Texas Insurance Group, Inc. (NTIG):
"Tax Tips"
http://ntig.biz/tax_tips.htm
"SEP IRAs. A ?Simplified Employee Pension IRA? is a tax-deferred
retirement plan provided by sole proprietors or small businesses, most
of which don't have any other retirement plan. Contributions are made
by the employer, and unlike the traditional IRA, can be as high as 25%
of each employee's total compensation, with a maximum contribution of
$41,000. For a sole proprietor, this can be a significant opportunity
to save for retirement on a tax defer basis."
See this explanation of how a sole proprietor claims herself at Investopedia.com:
http://www.investopedia.com/articles/retirement/04/020404.asp
You can find more ideas by repeating my search strings:
Search Strings:
capital gains tax strategies for selling a business
"capital gains tax strategies" AND "selling a business"
"capital gains tax" AND "selling a business" AND sole proprietorship
"capital gains tax" AND selling a sole proprietorship
defer capital gains + sale of business
defer capital gain + after sale of business +sole proprietor
defer capital gain + before sale of business +sole proprietor
defer OR minimize capital gains tax AND sale of business AND sole proprietor
I hope my research is of help to you. Good luck with the transaction.
Best regards,
nancylynn-ga
Google Answers Researcher |
Clarification of Answer by
nancylynn-ga
on
17 Oct 2005 11:44 PDT
Hello audiogear:
Here's some additional information you requested about personal goodwill:
"Personal Goodwill Can Minimize the Corporate Double Tax When Selling
the Assets of a Business, by Sean P. Kearney, of Fredrikson & Byron,:
http://www.fredlaw.com/articles/corporate/busi_0309_spk.html
"The Personal Goodwill Solution
In a 1998 decision known as Martin Ice Cream, a creative taxpayer
successfully argued that the goodwill of a business can be bifurcated
into goodwill owned by the corporation and goodwill owned by an owner.
The taxpayer convinced the Tax Court that the corporation's success
was largely based on the personal reputation and industry contacts of
one of the owners, and that most of the goodwill was personal to the
owner and had not been transferred to the corporation. Based on this
bifurcation of goodwill, the owner's personal goodwill is a separately
saleable asset that avoids the double tax and is subject to favorable
capital gains rates."
"Goodwill Hunting," by James Olan Hutcheson and Kevin Thomason,
published in the May 1, 2004, edition of Financial Planning, archived
at KeepMedia. (You can get a 30-day free trial here to read the
article in full):
http://www.keepmedia.com/pubs/FinancialPlanning/2004/05/01/540790?extID=10037&oliID=229
There's a case study example followed by an explanation, which cautions:
"In two 1998 U. S. Tax Court cases, the Court upheld the theory that
supports this strategy. Martin Ice Cream Co. v. Commissioner, 110 T.
C. 189 (1998) and Norwalk v. Commissioner, T. C. Memo 1998-279 (1998)
both stand for the proposition that the owner or founder of a closely
held corporation owns, in certain circumstances, some of the goodwill
associated with the corporation's business and can separately transfer
it. The IRS, of course, does not agree with the results reached in
these cases, but the cases stand unreversed and generally
uncriticized, except by the government. . .
"Goodwill is amortizable over 15 years by purchasers, regardless of
whether the seller is the corporation or the owner. If a seller has
enough leverage and starts working on this approach early in the
transaction, it should be easy to convince the purchaser to cooperate.
Even if the seller doesn't have much leverage, early exposure to the
issue can avoid a buyer's attempt to use its cooperation as some kind
of bargaining chip.
"Because the IRS may challenge this strategy, sellers should obtain an
independent appraisal of the personal goodwill prior to closing."
"The Big Deal About Personal Goodwill," published Fall 2004, by
McGill, Power, Bell & Associates, LLP, of Erie, PA.
It's easiest to access the cached link:
http://66.218.69.11/search/cache?p=%22personal+goodwill%22&toggle=1&ei=UTF-8&u=www.mpbcpa.com/library/newsletters/valuation/Fall%25202004%2520The%2520Big%2520Deal%2520About%2520Personal%2520Goodwill.pdf&w=%22personal+goodwill%22&d=G5-aBWFULelm&icp=1&.intl=us
"A corporate employee or shareholder can own goodwill separately from
the goodwill of the corporation if customers value the person ? rather
than the corporation ? as the center of their commercial relationship.
. . . One level of tax can be avoided on the sale of the assets owned
by the shareholder, thus reducing the total cost of liquidation.
However, this tax benefit can be achieved only if appreciated assets ?
including personal goodwill ? are kept out of the corporation."
"Consider a corporation with a fair market value of $5 million. Of
that, tangible assets are valued at $1 million and goodwill is valued
at $4 million. If half of that goodwill is valued separately as a
shareholder?s personal goodwill, the total tax savings is $560,000,
assuming a combined effective federal and state rate of 20 percent. .
. "
Two Additional Strategies:
From "Selling a Business? Eleven Ways to Minimize Taxes," published
by BottomLineSecrets.com's Tax Hotline:
http://www.bottomlinesecrets.com/blpnet/article.html?article_id=31530
" Loophole: If you must sell the company's assets, keep the corporate
entity intact in the form of a personal holding company. Operating as
a personal holding company for the proceeds of the sale of the company
lets you avoid double taxation. Tax is deferred until the time when
the personal holding company is liquidated."
And:
Loophole: Value your business based on "earnouts." That way, sales
proceeds qualify as capital gains and not "compensation" income.
Earnouts are sales agreements that call for additional payments,
typically over three years after the sale of the business, when
certain targets are met. Targets are usually based on profits . . ."
I'm very glad you found my Answer helpful, and I hope this additional
information is of use to you, too.
nancylynn-ga
Google Answers Researcher
|
