Tags: selling | business | capital | gains | tax

Selling a Business Without Capital Gains Tax

Selling a Business Without Capital Gains Tax
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By    |   Tuesday, 20 March 2018 07:06 AM

Do you own a business that has appreciated in value and ripe for sale?

For many Americans who own a business which represents a substantial part of their financial future, there comes a time to realize that value in cash.

The economy is improving, and people with investment capital are looking for tasty investments other than the stock market.

As history has proven, building on a successful business enterprise is an alternative investment which can bring significant financial and other rewards.

Being in control of your financial fate, rather than subject to the gyrations of Wall Street, is attractive to the entrepreneurial mindset.

But while finally obtaining the rewards of all that blood, sweat, and tears (so to speak) and taking enormous risks, not all the money goes to the business owner.

No, the business owner only comes in second place for cashing out.

Sitting out there is the shadow partner, the government, ready to take a cut of the sale proceeds as a tax. 

The government does not make avoiding taxes easy.  When it comes to tax, the government gets downright nasty.

While an individual business owner is at a disadvantage taxwise, the highly organized philanthropy industry has plenty of political muscle to protect its tax advantages. 

Saving federal tax on the sale of a business without undue conflict with the government means using a charitable tax planning structure.

For the ultra-wealthy (defined as those with excess income), charitable trusts have both income tax and estate planning value. Establishing a private charitable foundation enables them to donate large amounts of business interests or property while getting an income tax deduction, avoiding estate tax, and effectively keep control of the donated property. Easy examples are the Ford Foundation or the Gates Foundation.

For business owners and investors who want both the tax benefits and a continuing income, then an alternative planning structure is dictated.

For those desiring income and accepting that some minimum amount will go to charity, then a charitable remainder trust is used.

When current income is not needed for several years, then a charitable lead trust is how to go.

As expected with anything that involves taxes, there are certain hoops that taxpayers must jump through to make this work. Congress is not overly generous and does not accept what it sees as tax abuse.

The charitable lead trust and the charitable remainder trust are in effect the reverse of each other depending on whether the charity (which could be a private foundation) gets the property and income interest first, or last.

Because of these two possibilities, these trusts are commonly called split-interest trusts.

In a charitable lead trust, the trust then pays to the charity for a stated period either a guaranteed annuity or annual payments based on a percentage of the fair market value of the property held in trust annually.  The remainder after the term goes back to the donor or family as specified in the trust.

In the charitable remainder trust, it’s the taxpayer that gets those income payments with the charity getting the remainder at the end of the term or the end of life of the donor.

As expected, the tax anti-abuse rules add a little complexity. But then again that’s how tax planning professional earn their fees.

 The best charitable split interest structure depends on which combination of variables are used to achieve the taxpayer’s ultimate goal.

For many taxpayers selling their business, the complications and expense of using a charitable split interest structure may not be worthwhile.

But for others, using a charitable split interest planning structure could be just ideal for saving taxes, building a financially secure for yourself and family, protected from creditors, and achieving charitable goals to boot. 

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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For many taxpayers selling their business, the complications and expense of using a charitable split interest structure may not be worthwhile.
selling, business, capital, gains, tax
Tuesday, 20 March 2018 07:06 AM
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