It’s true that the best way to save on taxes that you will owe when you sell your business is to prepare for those taxes before you sell your business.
However, all hope is not lost if you’ve already sold your business or will in the near future.
Here at Consolidated Planning, we understand every business owner’s journey towards selling their business looks different. Regardless of where you are in the process, it’s never too late to begin working toward a better post-retirement lifestyle.
While most tax savings opportunities are available to you before you sell, this article will help you uncover opportunities for potential tax savings even if you’ve already sold your business.
3 Considerations For Savings AFTER You Sell Your Business
So, how can you still save on taxes after the sale of your business? Let’s take a look at how the income from the sale is realized, how capital losses affect things, and how you can include your favorite charities to maximize your savings.
#1 The Timing of Your Transaction
The timing of your transaction really matters for tax reduction opportunities. For example, if you sold to a third party, are you receiving all of the cash at once, or will it spread out over multiple years? The gains that come from the sale of your business will generally be taxed only as the income is realized.
So let’s take a look at your buyer. Did they come to the closing table with a large check? Or is there an installment note with payments due over the next five years?
An Installment Sale Can Help With Taxes
An installment sale is a great opportunity to ease the burden of taxes AFTER the sale of your business. An installment sale will allow you to spread out the payments you’ll receive over several tax years rather than receiving the full sale amount upfront. While this approach can have its downsides, it can be beneficial as it allows you to defer capital gains taxes over the note’s repayment period. By opting to receive your payments over time, you can potentially reduce the tax rate applied to each smaller payment and ultimately pay less overall.
Spreading out the sale proceeds doesn’t guarantee you’ll pay less taxes; it simply means you have more time to pay the income tax over multiple tax years as it is received.
#2 Capital Losses
When you sell an asset for less than you paid for it, you create a capital loss. Now, for most individuals, this doesn’t sound like a good idea. But hear us out – looking for opportunities to realize your capital losses can actually help you lower your taxes. That’s right. Save on taxes.
As a business owner, you generally only pay taxes on your capital gains at the sale. So instead of holding onto other investments or shares when they are down in value, it may be beneficial to sell them and realize the losses in the years leading up to selling your business versus holding onto them hoping they recover. This is called tax-loss harvesting.
The problem is, according to Investopedia, many people are loss averse, meaning the real or even potential to experience an investment loss is perceived as being emotionally more severe than an equivalent gain.
And while that does make sense from a psychological standpoint, what really matters at the end of the day is what you net. What you keep.
By selling at a loss you can actually save on taxes. Losses you don’t take right away stick around indefinitely and can be used to offset gains years later. These items might include:
- Stocks and bonds in your taxable brokerage account
- Investment real estate
- Other business ventures, and
- Capital losses from years ago
As daunting as it may seem, realizing your capital losses helps to offset the tax on future gains or income. It’s important to note that there are many rules when it comes to this concept, so don’t go it alone.
#3 Charitable Giving
Another option when it comes to tax savings is donating some of your sales proceeds to charity. There are a few ways you can go about your charitable giving.
Charitable Remainder Trust
A Charitable Remainder Trust (CRT) boasts many benefits before, during, and AFTER the sale of your business.
This type of trust allows you to transfer your business shares while receiving back an income. This strategy can provide immediate charitable tax deductions and may also allow for the avoidance of capital gains taxes.
With a CRT, you can avoid capital gains taxes on the donated value of the shares, and take a current income tax deduction up to applicable limits as long as the trustee of the trust organizes the sale of the company. The trust sells the business, and since the trust itself is a charitable entity, it will receive the money tax favored.
Here you will pay no capital gains taxes but can derive income from this trust until death. Once all beneficiaries of this trust have passed, the remainder of the trust goes to your chosen charity. Hence the name, Charitable Remainder Trust.
If you have already sold your business, you can still donate the proceeds to a CRT, but your tax benefits are reduced to a current-year income deduction up to the applicable limits.
Donor-Advised Fund
A Donor-Advised Fund (DAF) is another opportunity for a charitable giving account that boasts tax benefits after the sale of your business. Picture an investment account that you control, however, when you put your money in this account, it’s a completed gift for tax purposes. With a completed gift, you relinquish all control over your assets but get to deduct the contribution in the current tax year, up to applicable limits.
And, you don’t have to give that money to your chosen charity right away. The money can grow for years tax-favored and be sent to your favorite charities over time.
Typically, when selling your business, it’s not income taxes that you’re trying to offset. But, you can take appreciated assets and donate those into the DAF in exchange for the shares of your business that you sold. Essentially, creating an asset swap to generate more tax deductions for you. Because the DAF is a non-profit, it doesn’t pay capital gains taxes on selling any appreciated shares or property it receives.
#4 Opportunity Zone Investments
An Opportunity Zone Fund was created under the Tax Cuts and Jobs Act in 2017 to incentivize investment into projects located in economically distressed areas.
Any capital asset that you sell at a gain allows you to take the proceeds from the gain and reinvest it into this fund. From here two things happen:
- The taxation of the capital gain is deferred until at least 2026 (under current legislation)
- You receive back the proceeds from the investment, including all gains tax favored if held for a minimum of 10 years.
If you don’t need access to your capital gains today – this is a great opportunity for your future gains to be tax favored. Moreover, you have the chance to create an economic impact.
Plan Prior To The Sale Of Your Business
While hindsight is 50/50, if you’ve already sold your business, you need to focus on what you CAN do to ease tax burdens. And while it’s true that your options for tax-savings are more robust before you have money in hand, these strategies can still help reduce or manage your future tax liability. Now, we just have to determine which path(s) is right for you:
- Full or partial installment sale
- Harvesting capital losses
- Charitable giving and/or
- Opportunity Zone Funds
There could also be additional options, so the best place to start is by speaking with a professional. To begin proactive tax planning for other areas on your personal or professional balance sheet, talk with an experienced financial planner at Consolidated Planning.
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Exp. 10/2026
Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
This material contains the current opinions of James M. Matthews and Consolidated Planning only. These are not the opinions of Park Avenue Securities, Guardian, or its subsidiaries.
