The Mark Perlberg CPA Podcast
The Mark Perlberg CPA Podcast
EP 90 - How to Mitigate Taxes When Selling Your Business
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Selling your business represents a transformational financial event that requires extensive tax planning and collaboration to avoid potentially massive tax overpayments.
• Notify your tax advisor immediately when considering selling your business
• Assemble the right tax team capable of exit planning - many CPAs lack this expertise
• Consider tax implications in negotiations - understand the differences between asset sales and stock sales
• Buyers typically prefer asset sales for immediate tax benefits and liability protection
• Sellers usually benefit more from stock sales but might accept lower prices
• Determine what you'll do with the sale proceeds - this affects your overall tax strategy
• Non-passive losses can offset capital gains - not just capital losses
• Real estate professional status combined with cost segregation can create substantial tax deductions
• Advanced strategies include owner financing, deferred sales trusts, and charitable structures
• Reliable books and records are essential for accurate basis calculation and asset valuation
If you need help with selling your business or rental portfolios and don't have the right team in place, reach out at prosperalcpa.com/apply.
Your tax savings is going to give you all your down payment back. The rest is just profit coming in. It's like you're investing in real estate for free. He was a limited partner, so there was zero risk and he really liked you. This was one of our more risk adverse clients. All right, welcome to the show.
Speaker 1:I always love nerding out with experts in the world of money and finance. If you're an entrepreneur, what I'm about to discuss is a transaction that is probably going to be the most transformational event for your career and your finances. It will require the most amount of tax planning and collaborating that you will ever need, and that is selling your business. It's incredibly important that we have a really strong understanding in tax planning around selling your business. We see many of our clients have the highest amount of taxable income when they sell their business and I've seen overpayments in the millions because of a lack of effective tax planning. In fact, we're actually working on a amending return right now. We're expecting a $120,000 refund because there wasn't proper opportunities taken to reduce the tax on the sale of the business, and I'm going to go through what you need to know as a business owner when you're getting ready to sell your business and how to make sure you're doing everything you can to protect yourself from overtaxation. So when you sell this business at a profit, you aren't going to give all of it away to the IRS and you can keep this cash of your hard-earned money and use it towards your future, your retirement and future goals, instead of having it all tied up with the tax man. So the most important thing you need to do here and this is if you don't listen to anything else or you don't understand anything else, this should be understandable and if it's anything you're going to take away, this should be it. Tell your advisor as soon as it's going to happen, as soon as you start thinking about selling your business, make sure you have a tax team who is capable and lined up, ready to give you some guidance, so you're ready and you can be proactive in your tax plan.
Speaker 1:Now you may find that this is the time that you want to switch accounting firms or tax advisors, because very few advisors I meet and CPAs actually know how to do proper exit planning for businesses. There are so many different ways to look at this. I've seen so many people do it wrong and they're overwhelmed and they just assume that you're going to just pay the taxes because you have more money hitting your account and they don't realize all these other hidden opportunities and they don't realize all these other hidden opportunities. So, remember, be proactive. Make sure you get the right team assembled so you can really handle this effectively. Now, some of the things you also want to think about here is in the negotiation, you want to consider the tax implications, and that's why you want to have your tax team involved in day one the tax implications, and that's why you want to have your tax team involved in day one.
Speaker 1:One of the key elements that we want to consider here is is it going to be a stock sale or is it going to be an asset sale? They're treated differently for taxes. When you have an asset sale, you're going to be taxed in different ways. Some of your sale is going to be treated as long-term capital gain. You're going to be subject to depreciation recapture. Basically, the way it's going to look is the buyer is going to be purchasing all the assets from your entity and they're going to just continue a new business with your assets. Some of that may be your equipment, and if you fully depreciate your equipment now we have recapture of those assets. Some of this may be goodwill. So there's so many different ways. So there's all these varieties here.
Speaker 1:Now if you are going to be selling via stock sale, they're going to be buying stock and continuing your company, but now they own the stock. Most buyers are going to prefer the asset sale. Why? Because if the assets now go to their balance sheet, they get to write it off. They may be able to get that bonus depreciation up front or section 179 deductions. So if you are buying it upfront, it's going to be more favorable for tax advantage, as opposed to when you do a stock purchase you're going to write off the goodwill, amortize over 15 years. You don't get that immediate tax benefits.
Speaker 1:Now there's another reason why asset sales are going to be more favorable to the buyer is because they are not continuing the business and taking over that entity. The buyer is not going to be more favorable to the buyer Because they are not continuing the business and taking over that entity. The buyer is not going to be subject to the risks, the risks is not going to carry forward and they're not going to inherit all the potential liabilities that you may have accumulated over time and over the years as they're about to take over your business. So they don't know what potential malpractice lawsuits or employment lawsuits or whatever went wrong. They don't want to be held accountable, so that's another reason why they're going to be inclined to do an asset purchase instead of a stock purchase. So just make sure you understand the tax implications of this when you're factoring in the potential tax liabilities and also in the negotiations here.
Speaker 1:Now, some of the things I've seen is, if it's going to be a stock sale, which is usually more advantageous, the cost could be a little bit lower because of the benefits that the seller is getting in this situation. So when you think about this, you want to run the different scenarios and there's some tax traps here. I mean, one of the things you want to consider is we see a lot of people sell businesses over time through multiple payments or installment methods. Well, as soon as you sell that asset, the recapture is recognized, even if you haven't received all the income for that. So imagine you have $500,000 of bonus depreciation on your books and you're going to sell your business for $500,000 over the course of 10 years. So imagine in your first year you get $50,000. Well, you only get $50,000, but you're paying taxes on the recapture of $500,000. That can be really painful. So you really want to consider these variables here. Make sure you're planning Now.
Speaker 1:Another thing I want you to think about here is one of the first things we want to do is and this is you should really listen up if you're CPAs, because a lot of CPAs listen to this this is one of the first questions you should ask your client, or you should. First thing, you should tell the first thing that someone needs to know when it comes to asset protection, or one of the first things sorry, not asset protection One of the first things that your advisor needs to know when you're planning for the sale of your business is what are you going to do with the cash? Because if you are going to take that cash and deploy it to more assets that give you write-offs or other expenditures, that's going to reduce your overall tax liability and we may find that the net effect of the disposition of your business and what you actually do with that cash because some of that cash may be principal may offset all the capital gains. But let's say we're going to use the cash to go on vacation and buy a summer home or pay off our debts. Well, in this example, you're not going to see so much tax reduction from what you do with the cash. So in that example, you're going to likely see more liabilities.
Speaker 1:From this example it kind of goes back to the topic of holistic planning and really looking at everything and where are the goals. So we want to look at the client that's selling their business and say, okay, why are we selling the business, what are we going to do with the cash and how are we going to deploy it? And that's going to help us understand. First, we want to know what's the tax implication of doing nothing at all. So once we get a feel for, well, they're planning to use the cash from the sale to do this, okay, we do nothing at all. What are the tax implications If it's a lot of taxes? Now we got to strategize and consider a variety of opportunities. Sometimes we find that their exit plan has already taken care of the capital gains tax and we're good to go. So knowing where the cash is going to go and the tax implications is going to be really critical.
Speaker 1:Make sure you're on the same page and we can do those projections. Now here's another thing that you're not going to be able to do as listeners, but you should make sure that it is done is you want to make sure that you have complete and reliable books and returns. You want to make sure that we have reliable records of what your basis is in the company and what the assets are on the balance sheet, because what you don't want to do is find out that you have all these hidden items and that, as you're preparing correcting your return, there are all of these tax traps that were missed because you had unreliable records. So really make sure you're working with the right professionals and getting complete and accurate returns. Another thing I want you to think about here is making sure that we kind of touched on this.
Speaker 1:We get to the point where we're in the negotiation. We're looking at all these ways to structure the deal. We understand what's the tax impact and what we want to do with the cash. When we consider these things, we're really making sure that we're creating a tax plan and an objective that is aligned with your goals. So, again, going back to whether we're going to use it for personal reasons or pay off debts, there's going to be a tax strategy associated with all these different ideas and it has to be aligned with your goals and aligned with what you're comfortable with doing for tax mitigation. So once we have all these ideas understood here and we're working through the negotiations now we want to consider some strategies and we can.
Speaker 1:Working through the negotiations Now, we want to consider some strategies and we can. I think there is. In fact, there are podcasts just on capital gains planning. And, on a side note, I want to dispel a myth and I've seen some Instagram gurus say that you can only offset capital gains with capital losses and that's completely false. Any write-offs, any ordinary losses which are non-passive, can offset your capital gains. So we love doing cost segregation studies on real estate. So we have real estate professional tax status and we materially participate in our rentals. We can do cost segregation studies, get a ton of depreciation and move it into the year of the sale of the business. We had one client who sold his business for $16 million. We had $10 million in gains to plan for and we were able to create approximately $4 million of tax deductions because the wife was smart enough to get real estate professional tax status in the year of the sale of the business. We had all this real estate that had been building and building and building and then they bought more of it with the sale of their business and we did a ton of cost sags on those buildings and the losses were able to offset his taxes. Now, other ways we can use losses buying assets in other businesses, starting businesses with assets that get you depreciation. All these non-passive losses, the short-term rental loophole, are going to offset the capital gains events and create savings and can be considered as part of your business exit strategy, especially if you're looking.
Speaker 1:What we love here is let's say you're looking to exit your business and go into a more passive vehicle or live on your real estate rentals. Well, we want to make sure that we own the rentals in time If we can get real estate professional tax status in the year you sell your business. So let's say you sell the business in March of 25, and then you have the rest of the time to be a real estate professional of 25, and then you have the rest of the time to be a real estate professional. Now we can do those cost sags and use the losses to offset the revenue and the funds received from the sale of your business. Really cool opportunities here.
Speaker 1:There are some other very interesting, creative and sophisticated opportunities out there. One common strategy and this is sometimes just part of the negotiation, because they don't have the capital but owner financing. So selling it over time and then you recognize the gain over time can have some tax advantages and it can keep you in a lower capital gains bracket. And then sometimes we can do what's called a deferred sales trust. There's all sorts of charitable trusts out there. We don't have time to explore cruts and cracks and grats and annuities and annuitized products. But essentially there are all these ways where you can give your act, you can put your business into a charity and you get a deduction and the capital gains are untaxed by their own by the charity. But then you have this asset that you can make money on All sorts of complex strategies there.
Speaker 1:I may not even have explained those charitable structures perfectly here. There's so many of them Charitable LLCs, which we actually are very hesitant to recommend these days. But there's all these other sophisticated vehicles out there employee stock option purchases, if you want to have your employees take it over. We did what was called an F-REORG, where you're kind of exchanging your stock for the stock of the buyer. There's a whole world of stuff out there and we're not going to have time for it. Buyer, there's a whole world of stuff out there and we're not going to have time for it.
Speaker 1:But what I want you to understand is the foundational elements here. First, you want to notify your tax team. You want to make sure you have the right tax team to be proactive and they understand immediately or as soon as possible, that you're planning to sell your business and what you're going to sell the business for. You want to do an analysis of what's the tax impact based on the sale of the company and what your plans are to do with the cash. So if you're planning to sell your business and deploy that cash somewhere, you want to look at that impact. If we do nothing at all, if we sell the business and put the cash wherever you plan to put it, what's the tax impact? And from there we do the tax planning. And then there are so many different directions we can go, but what's most important for you is that you have clear communication and also, as I mentioned earlier, reliable books and records so you can effectively navigate the space If you're looking to sell your business.
Speaker 1:Congratulations. Hopefully, you're getting fantastic profits and you're super excited for the next chapter in your life here. In order to protect your wealth and enjoy this exit, just make sure you're considering those key strategies Then. Then you can work with a professional to navigate all the other complex strategies, if they apply to you. Now. If you found this helpful and you're thinking about selling your business or your rental portfolios and you don't think you have the right team in place, feel free to reach out. Go to prosperalcpacom slash, apply and we'll see what we can do for you. Your tax savings is going to give you all your down payment back. The rest is just profit coming in. It's like you're investing in real estate for free. He was a limited partner, so there was zero risk and he really liked you. This was one of our more risk adverse clients.