Since you are considering disposing of your business, we thought you might want to know about the tax effects of some of the many ways that your deal could be structured.
If you are looking for an all-cash deal, and are willing to trade an immediate tax bill to avoid future uncertainties, your biggest problem may be finding a buyer with the cash you want. To help things along, you might have to consider an installment sale where you sell business property in such a way that you would receive at least one payment after the tax year of the sale.
Installment sales of personal or real property by "nonaccrual method nondealers" (translation: by most business taxpayers) are reported under the installment method unless a taxpayer elects out. The installment method permits the reporting of gain from qualified installment sales as payments are received rather than in the year of sale. You might consider "electing out" when you anticipate higher overall income in future years, or have other losses in a current year that may offset full recognition in the year of sale. Even when an installment sale may spread out gain for tax purposes, however, a seller should be careful to get enough up-front cash to take care of "recapture taxes" that may be due in the year of sale no matter how little cash you receive from the buyer that year.
If you sell the assets of your business, you and the buyer will have to come to terms on how the total purchase price is to be allocated among them. Since your interests will not necessarily coincide, it's important for you to understand what the tax effects of these allocations will be. The tax laws spell out how these allocations should be made, but there usually is room for some planning and maneuvering here.
If you are interested in disposing of your business with as little immediate tax liability as possible, some creative alternatives may be open to you. You might want to merge your business with another, or enter into one of a variety of tax-free reorganizations. Each of these requires strict adherence to many technical rules, so you will need professional help at each step of the way to ensure that you achieve the desired tax result. You might only want to dispose of part of your business, or split it up among current owners, in which case you may be able to accomplish a spin off, split off, or split up on a tax-free basis.
If you have a successful business, but are having trouble finding a buyer, you may want to consider setting up an employee stock ownership plan and selling your company's stock to the plan. This can be done on a leveraged basis and results in no current tax to you if you reinvest the proceeds in other securities. It gives you the opportunity to diversify your company stock holding without any tax cost until you sell the replacement securities.
As you can see, there are many options to consider and many pitfalls to avoid when planning to sell your business. Please call us if you would like to discuss your plans and goals in more detail.
Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015.