How to Defer Taxes on Sale of a Business | Tax Planning Strategies

Introduction

When selling a business, taxes can take a significant bite out of the proceeds. Fortunately, there are various tax planning strategies that can be used to defer taxes and maximize the value of the sale. In this article, we will discuss seven strategies for deferring taxes on the sale of a business.

Utilize the Installment Sale Method

An installment sale is a method of selling a business in which the purchase price is paid in installments over a period of time. This allows the seller to spread out the income from the sale over multiple tax years, resulting in lower overall taxes due.

Benefits of an Installment Sale:

• The seller can spread out the income from the sale over multiple tax years.
• The buyer has more flexibility in making payments.
• The seller can avoid capital gains taxes until all payments have been received.

How to Set Up an Installment Sale:

• Negotiate the terms of the sale with the buyer.
• Determine the amount of each installment payment and when they are due.
• Draft a contract outlining the terms of the sale.
• Have both parties sign the contract.

Take Advantage of Section 1031 Exchange

A Section 1031 exchange is a tax strategy that allows a seller to defer capital gains taxes by reinvesting the proceeds of the sale into another “like-kind” property. This type of exchange must be structured properly in order to qualify for tax deferral.

Benefits of a Section 1031 Exchange:

• The seller can defer capital gains taxes on the sale.
• The seller can reinvest the proceeds into another property without incurring any immediate tax liability.
• The seller can potentially increase their return on investment by investing in a higher-yielding property.

How to Set Up a Section 1031 Exchange:

• Identify a like-kind property to purchase with the proceeds of the sale.
• Hire a qualified intermediary to handle the exchange.
• Complete the paperwork required to set up the exchange.
• Complete the purchase of the new property within the required timeframe.

Leverage a Deferred Sales Trust

A deferred sales trust (DST) is a specialized trust that allows a seller to defer capital gains taxes by reinvesting the proceeds of the sale into the trust. The trust then distributes the funds to the seller over a period of time, allowing the seller to spread out the income from the sale over multiple tax years.

Benefits of a Deferred Sales Trust:

• The seller can spread out the income from the sale over multiple tax years.
• The seller can invest the proceeds into higher-yielding investments.
• The seller can avoid capital gains taxes until all payments have been received.

How to Set Up a Deferred Sales Trust:

• Negotiate the terms of the sale with the buyer.
• Hire an attorney to draft the trust documents.
• Set up the trust with a trustee and beneficiaries.
• Transfer the proceeds of the sale into the trust.

Invest in Qualified Opportunity Zones

Qualified Opportunity Zones (QOZs) are designated areas that offer tax incentives to investors. Investing in these areas can provide a number of tax benefits, including deferring capital gains taxes on the sale of a business.

Benefits of Investing in Qualified Opportunity Zones:

• The investor can defer capital gains taxes on the sale of a business.
• The investor can potentially reduce or eliminate capital gains taxes on the investment.
• The investor can receive additional tax benefits if they hold the investment for at least 10 years.

How to Invest in Qualified Opportunity Zones:

• Identify a QOZ to invest in.
• Research potential investments in the QOZ.
• Consult with a tax advisor to determine the best way to structure the investment.
• Make the investment into the QOZ.

Consider Tax-Deferred Retirement Plans

Tax-deferred retirement plans, such as IRAs and 401(k)s, allow investors to defer taxes on the proceeds of the sale of a business. These plans also offer other benefits, such as tax-free growth and tax-free withdrawals in retirement.

Benefits of Tax-Deferred Retirement Plans:

• The investor can defer taxes on the proceeds of the sale.
• The investor can benefit from tax-free growth and tax-free withdrawals in retirement.
• The investor can save for retirement while minimizing their tax liability.

How to Set Up a Tax-Deferred Retirement Plan:

• Decide which type of retirement plan is right for you.
• Open an account with a reputable financial institution.
• Contribute funds to the account.
• Choose your investments and start saving for retirement.

Utilize Tax Credits and Deductions

Tax credits and deductions are a great way to reduce the amount of taxes owed on the sale of a business. There are a variety of tax credits and deductions available, so it is important to research which ones may apply to your situation.

Benefits of Tax Credits and Deductions:

• The investor can reduce the amount of taxes owed on the sale.
• The investor can potentially reduce their tax liability to zero.
• The investor can maximize their return on investment.

How to Utilize Tax Credits and Deductions:

• Research which tax credits and deductions are available to you.
• Consult with a tax advisor to determine which credits and deductions you qualify for.
• Complete the necessary paperwork to claim the credits and deductions.
• Submit the paperwork to the IRS.

Conclusion

Tax deferral is an effective way to minimize the impact of taxes on the sale of a business. By utilizing one or more of the strategies discussed in this article, you can defer taxes and maximize the value of the sale. It is important to consult with a tax advisor to determine which strategies are right for you.