Build Up the Bucks! How to Structure the Sale of a Client's Business to Increase the Cash Flow

Transcription

1 Build Up the Bucks! How to Structure the Sale of a Client's Business to Increase the Cash Flow Dr. Bart A. Basi CPA / Attorney at Law Senior Advisor The Center for Financial, Legal & Tax Planning, Inc. 1

2 Introduction Example: A simple mom-and-pop laundry center sale turns into a nightmare. The Seller was willing to sell. The Buyer had his financing ready. Deal fell apart. What happened? 2

3 Introduction The agent, acting as the seller s fiduciary, advised the seller to call his CPA so the seller did. The deal was called off immediately by the seller. Tax Consequences were IMMEDIATE and at a HIGH tax rate. Goal should be to REDUCE taxes and Increase cash to seller. 3

4 Roadmap DEFER All Begins with the Letter of Intent not a phone call to a CPA Charitable Remainder Trust Installment Agreements Section 1031 Exchanges Reverse 1031 Exchanges REDUCE Goodwill Enterprise Personal Stock v. Asset Sale Special Situations Real Estate Inventory Plant, Property and Equipment C Corporations 4

5 The Letter of Intent or Term Sheet Begins formal negotiation Document is identified as Letter of Intent Should lay out asset allocation 5

6 The Charitable Remainder Trust or CRT An arrangement in which property or money is donated to a charity, but the donor (called the grantor) continues to use the property and/or receive income from it while living. The beneficiaries receive the income and the charity receives the principal after a specified period of time. Defective Trusts An intentionally defective grantor trust (IDGT) is an estate planning tool used to freeze certain assets of an individual for estate tax purposes, but not for income tax purposes. 6

7 Installment Sales Defers Income by setting up the payments as installments Recapture of depreciation taken is taxable. Security Must word document to get shares as collateral Year Report interest income 7

8 1031 Exchange (deferral method) Theory is to keep and improve investment, not fear what could happen regarding taxes. Land-for-Land! Personal property must be of like kind class Example sale of a rental property 8

9 1031 Exchange Reverse Revenue Procedure demands taxes are paid in the year Parked Property property is parked for 180 days Exchange Accommodation Titleholder when property is parked, it is held with an EAT. 9

10 Goodwill (reduction) Goodwill Taxed at 20 % Amortized over 15 years if not self-created Intangible, not eligible for 1031 exchange 3.8% Net Investment Income Tax applies to income through investment (See Personal Goodwill later) 10

11 Stock Sale v Asset Sale Asset Sale Favors the Buyer higher tax basis in purchased assets Detriment to the Seller Ordinary Income due to depreciation recapture 1245 applies to depreciable assets 1250 applies to real estate Stock Sale Favors the Seller Capital Gains treatment of gains Liability is transferred Detriment to the Buyer assets have less basis Let s increase the cash to the seller! 11

12 Special Situations Real Estate Why is real estate important in a deal? 1. Should Seller lease to the Buyer? 2. Should seller sell to Buyer 3. Removal of real estate from transaction Example: Creating LLC for tax benefit before closing It s never too late to remove real estate 12

13 Special Situations Inventory How can we increase the cash to the seller? Identify the method of valuation as early as possible Establish a date to take a physical inventory count Hot asset profit that would have been realized in a sale applies in partnership accounting. 13

14 Special Situations: Plant Property and Equipment Take unrelated assets out of deal! Examination of balance sheet Example: Antique cars Excavating equipment Get asset listing early Example: Allocation approval by all parties? Be careful of depreciation recapture 14

15 Special Situations: C Corporations Use of Personal Goodwill Separate contract Taxable as capital gain to owner Tends to reduce C Corporation tax consequence. Reported on 1040 Schedule D Watch out for tax requirements 15

16 More on Personal Goodwill Covenant Not to Compete is a personal asset A. Must be reasonable in time and place. B. Useful in C Corporations as well reduces gain at corporate level. C. Covenant Not to Compete and Personal Goodwill are NOT the same thing. 16

17 Special Law doe the Ownership and Sale of a C Corporation Permanent Law as of 1/1/15 No taxes to the seller if requirements are met. Bottom line it increases cash to the seller! 17

18 Conclusion Taxability and cash effects must be discussed up front. Begins with the Letter of Intent. Hire experts if necessary, but not at the last minute. Always look for ways to increase the after tax cash flow for the seller 18

19 Contact Information Dr. Bart A. Basi, Senior Advisor CPA / Attorney at Law The Center for Financial, Legal & Tax Planning, Inc W. DeYoung St, B200 Marion, IL B-basi@taxplanning.com 19