What To Do With Business Sale Proceeds

Jim Lorenzen, CFP®, AIF®

 

When you receive business sale proceeds, you’ll likely pay a capital gains tax; but, that may not be the end of the story.

Suppose you have $1 million or more after the sale – money you’d like to put somewhere for future use – but you also want growth with safety and tax-deferral, too!

You could use our 401(k); however, there are funding limits in any given year and those limits don’t carry over.  Besides, the safety issue could be problematic.

Bank certificates of deposit can provide safety, but not growth or tax-deferral.

If you’re selling your business next year, you’ve waited too long to plan.  However, if your sale is scheduled for ten, fifteen, or twenty years from now, this IS the time to get your ducks lined-up – and this report might help.
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If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Business Owners Face Potential Tax Law Changes

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Jim Lorenzen, CFP®, AIF®

1954

1986

2017

What do those years have in common?    If you guessed those were the years of major tax reform, you’d be right—at least about the first two.  2017 is still a question mark.

While tax law changes can occur quite often, major reforms appear to come around about every thirty years.    Business owners, unlike the rest of America, will have to deal with the impact of any changes on both the personal and business front.

Most Americans don’t own businesses and can be excused for not understanding many of the issues business owners face.    First, most businesses tend to be small – proprietor-owned – and are therefore taxed at individual rates; and that includes partnerships.  They don’t get taxed at the lower corporate rate; yet, these owners represent most of the job creation.  Those who are successful, pay at high rates – and even more if they’re in a high tax state!   It’s not uncommon for a successful small business owner in a high-tax state, like California or New York, to be faced with having to make $300,000 in pretax profit, only to see half of it go to federal, state, and local government, leaving about $150,000.  Sound like a lot?  Not if you’re in one of those high cost-of-living states, which usually happen to be the same ones, in which case $150,000 is often just middle-income.   Makes it pretty hard to create jobs for other people – often the reason many of these businesses often relocate to low-tax states (with a lower cost of living) to grow their businesses, where they find it easier to create jobs.

How about corporations?  Most Americans don’t realize that those who incorporate their businesses are taxed twice.   Their business pays a tax on profits BEFORE the business pays a salary to the business owner, who then must pay a second income tax!  And, of course, we’re back to the high income-tax state issue.

The government drains money from the people who create the jobs; so, no wonder – as people want to see more jobs in the economy – tax reform is such a big issue.

Proposed Changes for Business

Under the proposed tax bill, which still faces much debate, the corporate tax rate would be reduced to 20% – a substantial cut.  S-Corps would see their rate drop to  25%.  Well, maybe not – what day is it?  This all changes with the wind until it’s law.

One of the proposed changes, favored by many business owners,  would allow for the expensing of capital expenditures—no doubt in an  effort to spur growth.   However, there could be a fly in the ointment for many business owners in a provision no one’s talking about.

You’ve heard about the  ‘border tax’.  Under this provision, there would be no cost-of-goods deduction on imported goods—a potential problem for many retailers, as well as manufacturers who outsource some or all of their supply chain.

Many businesses that have spent years researching and developing their supply chains may face some formidable challenges.  There would be a deduction for the cost of goods exported.

Finally, there would be no deduction for business loan interest under the proposed plan.  This may not be a big issue now, given today’s low interest rates; but, it could become a major issue if we should ever experience the double-digit interest rates similar to those of the late 1970s.

Business owners are individuals, too.

As if dealing with all a business owner faces isn’t enough, there’s also the personal side.   There are  some potential changes looming on the horizon there worth knowing about.

Individual tax rates would come down and reduced to three brackets.

The elimination of all itemized deductions except for mortgages and charitable contributions is also popular with many, but not everyone.  The proposed change for charitable deductions limits those deductions to $100,000 for a single payer and $200,000 for a married couple.  It may become difficult for a  charity to convince a multi-millionaire to donate that $1 million work of art !

And, while there’s talk of repealing the estate tax, it doesn’t appear to be a complete repeal.  The government still wants that unrealized appreciation taxed!  The talk is about going to a system similar to what they have in Canada.

The idea would be to tax unrealized appreciation over $5 million at a capital gains rate.  Taxes on gifts would correspond to eliminate people using gifting to avoid the estate tax.

Finally, the newest proposal would also do away with deductions for medical expenses—or at least have a very high threshold.

All these are proposed—not passed.  But, it’s good to be aware

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of what could be on the horizon.

What Should Business Owners Do?

You might discuss these points with your tax advisor—I am not a CPA.  I am a CFP®, AIF®,,,,  EIEIO.

 

Planning Point

If you don’t have an executive bonus plan, you may want to consider starting one and paying the bonus before March 15, 1018.  Same if you do have one.  Your business gets the 2017 deduction while the employee may be paying tax on the bonus received at lower tax rates.   If you’re `grossing up’ the bonus to cover the employee’s  tax payment, that would be under the 2018 rates, as well—remember, talk to your tax advisor.   If you want to learn more about these plans, you can access my special report here.

Planning Point

Don’t neglect what is probably the most versatile financial tool available today:  cash value life insurance—it has tax benefits that no other financial vehicle can provide and is an ideal retirement supplement—especially for high-earning executives and owners who are limited in what they can put away in qualified tax-deferred vehicles.  Quite often, these executives are stunned to find out those limits simply will not allow the account to provide enough capital at retirement for them to preserve their desired lifestyle.

As David McKnight points out in his book, Tax Free Retirement, life insurance is used as a key retirement strategy by more than 85% of Fortune 500 CEOs and many members of Congress.  The book was also endorsed by retirement guru and CPA Ed Slott, as well as David M. Walker, former Comptroller General of the United States.

Sometimes, I will see arguments against this approach in the media – arguments that are little short of idiotic – but, the simple truth is that insurance, including indexed universal life (IUL) in particular, is becoming widely accepted among leading experts in the profession as a true asset class (in addition to cash, stocks, bonds, real estate, and commodities), probably as a result of an aging population with changing priorities and increasing economic uncertainty (where the government’s future need for tax revenue is concerned).

  • Your tax advisor can provide the best insight regarding tax strategy;
  • your estate planning attorney can help you make sure your documents are updated and in order; and
  • your financial advisor should be able to help you arrange assets to fit your needs.

Never use a podiatrist for dental advice.

I hope you found this helpful.

If you would like help, of course, we can always visit by phone.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

What Business Owners Need Most!

Jim Lorenzen, CFP®, AIF®

 

Business owners spend long hours for many years trying to build their dream.  For many, their business represents 70%, 80%, even 90% of their net worth!   It’s not unusual to have everything tied-up in their business ownership.

In essence, they have everything riding on one stock – something they’d never do with any other stock, even if the company was run by the greatest CEO on earth.

Their business is the source of their income, including salary and bonuses, as well as the source of all their benefits, including retirement funding and health insurance.

Business owners spend 110% of their energy on trying to grow their business; yet, if you ask them how they’ve planned their exit, you’ll often get a blank stare.  Some say they plan to work ’til they drop; others say they’ll sell it, sure that it will be an attractive purchase.

How many will exit their business?  Answer: 100% – either head first or feet first.   Either way, how will the business be monetized?

Many don’t know what their business is worth.

I personally know one person who built a small but very successful restaurant chain that enjoyed excellent sales – until he unexpectedly (and rather quickly, unfortunately) contracted terminal cancer and died.   The restaurants soon all went into receivership and were either liquidated or taken-over for pennies on the dollar – the family left with only his life insurance proceeds.

Many have no idea how they will exit.

It didn’t have to happen that way.  He had key people in-place; but, he didn’t know how to plan business continuity.   He also could have created a funding mechanism for his family to monetize all he’d worked for (in addition to his life insurance), but he hadn’t done that, either.

He, like many successful business owners running established businesses, didn’t even know what his business value, let alone have a mechanism in place to convert his asset into liquid dollars…. something he could have enjoyed even if he’d lived.

He probably didn’t want to spend the money on a formal appraisal; but, he didn’t have to do that, either – informal valuations for retirement and exit planning could have met his needs.  [You can learn more about business valuation in our free report, which you can access here.  If you would like a copy, we’ll also make sure you receive other relevant information from time to time.]

How about the business with multiple ownership?  If/when something happens to one of them, do the others want to have the surviving spouse as a partner – maybe an equal partner – even though they may make little or no contribution to business success?

What if there’s a divorce?  What if one simply decides to ‘hang it up’?  What if one files for bankruptcy?  Without the right mechanisms in place, the other owner(s) could be facing litigation or liquidation.

Many don’t know the solutions that are available.

He might have felt he didn’t want to siphon off dollars from cash flow that could be otherwise used to grow his businesses; but, there are mechanisms that can mitigate that concern, as well.

Successful owners of established businesses can be busy – often too busy to pay attention to the very issues they see as their ultimate objective in the first place.

I can empathize.  Years ago I built a publishing business.  Publishing weeklies combines the functions advertising, sales, production, manufacturing, distribution, credit and collections.   Front to back, it entails virtually every business function you can think of, including deadlines and resource management.

I had a general manager named Nick who came up ‘through the ranks’ and became very capable at running the entire organization, allowing me to pursue other initiatives.  I ended-up selling my businesses on the open market; but, had I known, I could have actually sold the whole thing to Nick – probably for more money even though he didn’t have much money.  Simply by putting the right mechanisms in place early, I could have had a ready-made buyer in place… and one who not only knew the business, but knew the customers – and one that wouldn’t have made the bankers nervous.

Enjoy!

Jim


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.