Selling a business may be the deal of a lifetime, but how these transactions are taxed can have implications for generations.
For instance, an owner could choose to defer gains through an installment sale, where purchasers make at least one payment in a different tax year. That strategy, however, comes with the risk of higher future tax rates. Earlier this year, the Biden administration called for doubling the capital gains tax rate over the current maximum of 20%.
For owners planning to pass along money to their heirs, using an intentionally defective grantor trust is among the most desirable strategies, he says. These trusts allow an individual to still get income from certain trust assets, such as business holdings or real estate. Though the owner pays taxes on this income when he or she is still alive, their estate is reduced and there are no estate taxes paid on the trust upon death.
A stock sale allows sellers to potentially be taxed at a lower rate of up to 20% in capital gains taxes on any profits.Before a sale, many business owners will ask whether they can donate stock to charity and receive an income-tax deduction, Doyle says. An individual who uses this vehicle gets a charitable income tax deduction in the year the trust is funded equal to the remaining value the charity eventually receives. Meanwhile, income taxes are due on the annual distributions.
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