The start of a new year is always fun for me. It is a time to measure success (or failures) from the previous year and, hopefully, to put new plans in motion to have greater success. As a business and financial consultant, my observations about the lack of planning among business owners resonates as a common challenge. Many entrepreneurs get caught up in the day-to-day operations and may neglect the importance of strategic planning and adapting to changes in the business environment. My goal is to encourage clients to implement a more proactive approach, which can be beneficial both short and long term.
If you are reading this, you have probably read my previous articles about the importance of good planning, especially in the area of exit strategy. This time, I want to talk about the factors that might hinder the flow of value from the sale of your business to your pocket. The biggest threats to enjoying the monetary fruits of your labor are no surprise, as they are universal guarantees: death and taxes. That’s right — even when you no longer own a business, Uncle Sam would like to have a word with you. He is very interested in what you plan to do with all the money you just made.
Depending on the structure of your exit plan, you have about 18,500 different kinds of taxes you are likely to encounter. You might find that the IRS considers your business sale to be completely ordinary income, and all of it is lumped into a single tax year. This could rocket you straight to the top of the tax brackets, which you definitely will not enjoy. However, good planning might be able to prevent this. In certain situations, proceeds from a business transaction can be considered a capital gain. This can be pretty nifty if it is a long-term gain and even more so if you have any capital losses to offset against it. Not every sale has this option and it will not happen by accident. Good planning is key.
You may also have to brace yourself for a little surprise the IRS calls “depreciation recapture,” in which the assets of your business you have depreciated could factor greatly in how much money you walk away with at the end. These are just a few examples of the kinds of taxes that could impact your exit. I cannot stress enough how important it is to have a tax expert as you make plans. The tax code is complex enough, and that is before someone decides to change it — which happens a lot.
“But Victor, I already successfully sold my business and paid the taxes. I’m good now, right?”
Not even close. Now you need to watch for taxes on any gains you make on investing those assets. You might also have to pay income taxes on the money you are pulling from retirement accounts. The really big one to watch for, though, is the estate tax, which affects your assets after you die and as your assets transfer to your heirs. There is a threshold for the value of your estate which triggers this tax, and unfortunately, that number changes almost every year. In fact, as I write this, there is a change coming in a few years that would cut the threshold amount in half. Suddenly, tons of estates are going to have to pay this tax, and many people do not even know it exists. If that does not motivate you to get an advisor, I don’t know what will. Once you find one, make sure you meet with them regularly because a perfect plan will not stay that way on its own.
I hope I have not scared you. I am really excited about 2024 and all of our potential. Changes are good but not always easy. You can be as successful as you are willing to put in the work for. Just don’t try to do it alone.
Victor Werley CFP, ChFC, CDFA, CVA, MAFF, CFE, CEPA, is a financial consultant in Little Rock and the founder of Pinnacle Advisors. Werley has practiced for more than 20 years and has managed hundreds of business transitions for himself and his clients. He has spoken to numerous groups in the business and legal fields about business valuation, how to structure good business deals and many other topics. He is passionate about small businesses and helping the economy of Arkansas.
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