Selling your business? Use a structured installment sale to defer that crushing tax hit
One of the biggest misconceptions about the use of a structured installment sale program is that it can only be use to defer capital gain taxes on the sale of real estate. That simply is not the case and in reality the tax savings and planning advantages for using a structured sale for deferring the tax hit on the sale of a business is in many cases a bigger advantage than when it’s used in a real estate sale.
What are the primary advantages of using a structured installment sale when selling your business or professional practice?
First it’s important to determine with your tax counsel that if your business is properly established as the type of LLC or LLP or Corporation that qualifies for capital gains treatment upon the sale. Once you have it established that you DO qualify for capital gains upon the sale of the business, you can then set about to strategically plan the tax impact and cash flow of that transaction, well in advance of the closing, using a structured installment sale strategy.
The most notable advantage of using a structured sale to spread out the tax hit on the sale of a business is the ability to guarantee timing of payments and the amounts down to the penny. Rather than paying a huge capital gain to the state and federal tax authorities and then trying to reinvest the balance to get back what you lost on the tax hit, you instead can invest all or part of the funds into a structured installment sale and avoid that huge initial tax bill. Plus, given the guaranteed nature of the funding agreement, you know exactly how much money is going to be recognized as gain in any particular tax year, as well as exactly when you will receive that money each year. This allows for tax planning, cash flow planning and in particular reinvestment of the funds into tax deductible vehicles such as retirement programs you want to fund or estate plans you are funding with insurance payments.
The second advantage of a structure installment sale of your business is the full and complete release of obligation of the buyer to make payments. Many business sales involve “earn out” agreements in which the seller agrees to stay on in some capacity to transition the business. With the structured sale you have a fully guaranteed agreement, not held as an asset or liability of the buyer, and as such you know you will be paid the agreed upon amount regardless of the performance of the business after the sale. These structured installment payments can create a financial foundation to pay you and your family the money they need in an orderly fashion with out fear of attachment by the buyer due to other purchase agreements in place.
The final benefit that needs to be noted is the financial guarantee of the issuing companies which fund these agreements. At the time of this post in 2019 there are two primary life markets which provide structured installment sales. MetLife and Independent Life. The fact that you obtain top credit protection coupled with guaranteed returns, insulates you from subsequent market down turns, business reversals and gives you the comfort of guaranteed payments. Peace of mind that checks show up on time and in the amount agreed for are worth a great deal after the sale of a business when you are typically living on the proceeds of that sale and planning the next stage of your life.
In summary, the ability to defer taxes, obtain guaranteed returns and precise timing of the money, all with the safety of major life insurance company guarantees as well, is a fantastic planning tool for business owners selling their business. To learn more contact the offices of Wahlstrom & Associates in Scottsdale, AZ to see if this planning tool is the right choice for your situation.