Tax Planning & Your End Game: What Business Owners Need to Know

We can’t stress enough the importance of having an exit plan for your business from the start. An exit plan allows you to lay out transition of ownership and passing of responsibilities associated with your business. Ultimately, it will give you peace of mind as you work on your business, knowing you already have your end game in motion.

Plus, by working on your end game early on, you can hopefully save yourself some time and headache later. One of the key areas where this is especially applicable is taxes. Without the proper planning, taxes can trip you up at the end if you haven’t planned from the beginning.

Here are a few common exit options and some key tax issues:

Buy-sell agreement.

A buy-sell agreement lays out a roadmap for what happens to the business should a specified event occur (we’re talking retirement, disability, death, etc.). Among other things, it can lay out methods for setting a price for owner shares, allows for business continuity and provides a buyer with a way to fund the purchase of the business.

But what about the taxes?

Life or disability insurance associated with the business often helps fulfill the need for funding the purchase. One of the biggest advantages of utilizing life insurance this way is that proceeds are generally excluded from the taxable income of the beneficiary (the person receiving the benefit from the life insurance policy).

Family succession.

You do have the ability to transfer your business to a family member. This is done by giving them interests or selling them interests in your organization (or both).

But what about the taxes?

There’s an annual gift tax exclusion which allows you to gift up to $14,000 of ownership interest under your gift tax annual exclusion without incurring federal gift tax consequences.

ESOP.

Some individuals choose to transition their business to their employees through an employee stock ownership plan (ESOP). An ESOP is a qualified retirement plan created to purchase your company’s stock.

But what about the taxes?

There are all sorts of tax implications and benefits for ESOPs. Check out the National Center for Employee Ownership for a list of some of the major tax benefits of going this route.

Sale and acquisition.

You’ve built something from the ground up and now you’re ready to sell it. Or maybe, you’re ready to add on through acquiring another company. Either way, you need to have your business in a ready state, including transparent operations, updated financials and streamlined processes and procedures.

But what about the taxes?

Here are a few tax considerations to think about:

  • Asset v. stock sale
  • Tax-deferred transfer v. taxable sale
  • Installment sale

The moral of the story.

It’s safe to say taxes have far reaching implications on your business, including how you plan to transition out of that business. That’s why it’s important to consider your end game early and prepare for the tax implications that come with it.

A trusted tax adviser can help you navigate all these circumstances and discuss what will work best for your business and your goals. That way you’ll prepared for the end, before you actually get there.

A version of this post first appeared in our 2017-18 Tax Planning guide.

YOUR END GAME: The Importance of Sales Tax

One thing we find is that businesses are really excited to start. You have great ideas and you’re ready to make your dream a reality and introduce a product that will change the world … or at least the way we’ve always done something.

What few businesses add to their mounting to do lists when they start is to think about how they’ll END. Your end game is critically important to consider at the beginning because it helps you chart your course.

Here are a few questions you should be asking right from the beginning:

  • What is your business goal?
  • How do you plan to grow your business?
  • What happens when it comes time for you to exit your business? Who takes over?
  • How do YOU want to exit your business?
    • Merger?
    • Acquisition?
    • Sale?
    • Retirement?

These are just the beginning of numerous questions you can ask. And these don’t take into account a critical component to your end game: SALES TAX. Yes, the current sales tax laws at the time of a buy/sell transaction have an implication on your business. And for you serial entrepreneurs out there, it also has an impact on businesses you buy.

Buyers need to be alert to unpaid or unknown taxes in advance. Otherwise you may be in for a world of hurt when you acquire hidden liabilities. Sellers have to demonstrate you have addressed things like sales and use tax, nexus and payroll tax … to name a few. The way these items are handled can impact the purchase price and what can be done to successfully close the deal.

Now before you freak out, RELAX. We can help. Join us as we discuss how sales tax laws play into business transactions and things you should watch for. You can find us in Mankato on August 2, Sioux Falls on August 3 and Fargo on August 4. We’ll even give you lunch.

P.S. Check out these different considerations when talking about Your End Game. Just make sure you start talking about it early.