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Capital Gains tax strategies for Selling a Business

• Capital Gains tax strategies for Selling a Business Please list top 10 strategies to defer or shelter capital gains from sale of a small business, along with a short summary of each strategy so that I can further research the strategy. Summary: Computer Graphics Studio Sole Proprietor 10 years in business Married Filing Jointly/One Child Sale Price 300,000 Asset Allocation Equipment 50,000 -- Ordinary Income Goodwill/Customer List etc 250,000 -- Capital Gains No mention of Non-Compete covenant as that's ordinary income, and I don't want to be paid as a consultant because the tax rate for Capital gains is lower than for Ordinary Income. I can't do a Like-Kind Exchange because there is no real property involved and Goodwill is not eligible for Like-Kind Exchange So, since the Buyer and I will both be filing identical IRS 4797 "Sales of Business Property" and IRS 8494 "Asset Acquisition Statement", I need other ideas in order to minimize the capital gains tax.

• Answer:

  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.' " ***************************** 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