In most small business C-Corp or regular corporation sale situations, a sale of corporate assets will result in double taxation of the assets. The C-Corp is taxed first and then the owner will also be taxed on any recognized gain when they receive payment from the corporation as a result of the sale. Whereas, if your business structure is anything other than a C-Corp (LLC, Partnership, S-Corp) taxation only occurs at the owner or personal level (NOTE: If you’re a C-Corp and planning a sale at least five years out, ask your CPA about converting from C-Corp to S-Corp).
One way to avoid a double tax as an owner of a C-Corp is to sell the stock of your business rather than the assets. This is not easily done as a buyer wants the tax benefits of buying assets, and often doesn’t want any potential liability tied to the stock shares. However, if you are successful in negotiating a sale of stock, a resulting question will probably be, “Now, how can I also minimize taxes at the personal level?”
With proper planning, a Charitable Remainder Trust (CRT) can be a very effective tool in avoiding or deferring tax and provide other benefits:
A current income tax charitable deduction.
Appreciated business assets donated and then sold by it avoid capital gains tax.
Proceeds from the sale of the business interest within the CRT can be used in diversifying into other assets to generate income for the life of the donor (business owner) and their spouse.
A significant gift to a charity of choice is eventually made at your death or the death of your spouse and is excluded from your estate for estate tax purposes.
Income accumulated within the CRT may not be subject to income tax.
Some of the significant planning considerations include:
Creating the CRT and transferring business assets prior to a binding sale agreement.
A qualified business valuation will be required.
The trust is irrevocable and cannot be changed.
The tax benefits result due to the assets placed in the CRT eventually going to charity and not the owner’s children/family.
There are limitations to what the trust assets can be invested in (i.e., cannot be invested in another business).
For the right situation, a CRT can be very beneficial for an owner and their tax, estate and legacy planning. Have discussions now with your tax professionals to see if it could be right for you.
For a comprehensive approach to your exit planning, contact us today at email@ennislp.com or 301-859-0860. You can also assess your exit readiness with our FREE Exit Readiness Questionnaire.
