Selling Your Business? Tax Strategies to Keep More of What You Earn
“It’s not what you make; it’s what you keep.” This adage is especially true when business owners are approaching an exit. The sale of a closely held business can often trigger higher-than-normal taxes, not only from higher marginal rates but also from higher capital gains rates, the net investment income tax, phaseout of credits or deductions, and local wealth taxes like the “millionaires’ surtax” in Massachusetts.
To gain an edge against these costs, business owners should look at their existing investment portfolio structure — something that might otherwise take a backseat when the focus is on the business itself.
Implementing a proactive tax management investment strategy may help reduce the tax impact of capital gains that might otherwise add to the tax burden. In addition, via a separately managed account (SMA), tax-smart trading may create capital losses, which if available and appropriate can help offset taxable gains from the business sale.
An SMA is a professionally managed, customized portfolio of individual stocks. Unlike a mutual fund, where your money is pooled with others, in an SMA you directly own the stocks in the portfolio, allowing for more control. Here’s how an SMA may provide tax management opportunities that can help manage the tax consequences of capital gains, particularly for a business owner who is about to sell their business:
Tax-Loss Harvesting
Within an SMA, the portfolio manager can actively sell securities that have declined in value to realize losses. These losses can offset the capital gains realized from the business sale, thereby potentially reducing the overall taxable gain.
Deferring Capital Gains
The portfolio manager can structure the timing of sales within the SMA to spread out capital gains over several years, rather than realizing them all at once. This can help manage the timing of certain portfolio-related gains and losses, which may help support broader tax planning objectives.
Minimizing Short-Term Gains
SMAs can be managed to help avoid short-term capital gains, which are taxed at a higher rate than long-term gains. By holding assets for longer periods or strategically selling long-term investments, the portfolio manager may help reduce the overall tax impact.
Donating Appreciated Securities
An SMA can facilitate the donation of highly appreciated securities to a charitable organization. By donating these securities instead of selling them, the business owner may avoid capital gains taxes on the appreciation while also receiving a charitable deduction for the fair market value of the asset.
A donor-advised fund (DAF) could also be used to enable gifting over time.
Family Wealth
An SMA can facilitate gifting appreciated assets to family members as part of an overall wealth transfer strategy. Any tax benefits will depend on individual circumstances and applicable tax rules.
By using an SMA, a business owner can take advantage of sophisticated tax management strategies that may help manage the tax consequences of capital gains, optimize the timing of certain gains and losses, and integrate these efforts into a comprehensive financial plan. This is particularly beneficial when dealing with the large capital gains associated with the sale of a business.
If you are a business owner and haven’t worked with an advisor to understand the plan you need in place to exit your business on your own terms and help you evaluate planning strategies related to your transition goals, our Wealth Management teams would be happy to help. Let’s talk.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment or tax advice from Savant. Please consult your investment or tax professional regarding your unique situation.
Paul J. Higgins
Financial Advisor
CFP®, AWMA®, CLU®, ChFC®, CLTC®, MBA