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How to Avoid Taxes When Selling Your Business

Three ways to avoid paying taxes when selling your business. 

1031 Exchange 

In a 1031 exchange the seller of a business is required to buy another similar business after the sale of their current business. To meet the exchange rules the seller has to identify three potential new businesses within 45 days of closing the sale on his current business. 

The timelines and requirements of a 1031 exchange are very rigid so give this option a lot of thought before committing to it.

The fees for this approach are minimal but the seller must use a qualified 1031 intermediary to handle the exchange. The disadvantage of this approach is you do not get to take possession of your money after the sale as it has to go directly to the purchase of a new business. 

The ESOP Plan

If you own a C Corp., by setting up an employee stock ownership plan, you can roll over the proceeds from the sale of your business on a tax-deferred basis. You receive cash on the sale and reinvest it in a diversified portfolio (it’s called a 1042 rollover after the Internal Revenue Code section that allows the move). It’s basically a deferral play; you pay capital gains taxes on distributions. But if you hold onto the securities until you die, you get a step-up in basis and you avoid the capital gains tax altogether.

Additional details on setting up an ESOP plan … https://www.esop.org

Deferred Sales Trust

In a deferred sales trust the business seller has total control over how the money is invested. The seller will contact the investment company to setup the trust before the sale completes. The funds from the sale are invested like a SEP IRA. The seller can direct how the investments are made or if he prefers he can hand over those responsibilities to the trustee. The seller can also enter into an agreement with the trustee for a specified return on the investments. 

There are no taxes while the money remains in the trust and taxes are paid only when constructive receipt is taken by the seller. As for the fess there tends to be a setup fee and annual management fee.

One nice advantage of this approach is that the seller can take regular withdrawals from the trust and only be taxed on the amount that is withdrawn.  

Other Options

For more information about these options and other scenarios where you can save money on the sale of your business contact Versant Business Advisors at info @ versantbusinessadv dot com or click on the Contact Us link at the bottom of the page.