By Sid Tobiason, Amy Stillwell, and Lewis Fisher, CPA, Moss Adams LLP
Think about the things you plan for – a new home, a dream vacation, or retirement. The income tax plan for your dealership sale is probably not the first thing that comes to mind. However, the tax savings resulting from that plan could help pay for your new home construction, vacation, or retirement.
Many dealership owners structure their stores and real estate holdings to operate efficiently, which often means they aren’t set up with the sole purpose of reducing the tax burden of a future sale. When confronted with a potential sale, owners can become paralyzed by the fear that the income tax on it will be significant—leaving them with little time to prepare and fewer options for reducing their tax burden.
Creating a Tax Plan
Planning for the sale of a business sooner rather than later can reduce the associated tax burden and help with the realization of long-term personal financial goals. Owners who begin to plan for the sale of their dealership five years in advance find that it affords them more opportunities for tax savings than if they were to start planning one year ahead of the sale, or even three. No matter how far out the sale is, however, there are options for decreasing the associated tax burden.
Immediately Before Sale
Although planning for a sale immediately before its occurrence may diminish the opportunity for tax savings, there are still multiple avenues available to owners to reduce their tax burden. These include:
- Employing the exchange structures detailed in US Internal Revenue Code Section 1031, which are primarily used for real estate but can also be applied to a portion of a sale of intangibles
- Valuing and attributing a portion of total goodwill to personal goodwill
- Planning for the continuation of some business activity to avoid immediate liquidation
- Formally liquidating the business in the same year as the sale’s closing, dependent on income tax basis
Two to Three Years Prior to Sale
Dealership owners who begin planning for a sale two to three years in advance have additional tools at their disposal:
- Using a spin-off or split-up to restructure the business
- Changing a C corporation to an S corporation to reduce the built-in gains tax (the double tax effect of an S corporation)
- Apportioning goodwill between corporate and personal to reduce exposure to the built-in gains tax
- Selling portions of the business to various estate planning tools, such as a grantor-retained annuity trust
- Merging various entities with the potential to offset gains and losses
- Contributing appreciated business assets to a charitable organization, trust, or private foundation
Five Years Prior to Sale
Owners who begin planning five years or more in advance of a sale will find that they have the most tax-saving options available to them. In addition to the items outlined above, they can pursue:
- Changing a C corporation to an S corporation to completely avoid the built-in gains tax
- Mitigating any last in, first out recapture with carefully timed corporate deductions
- Making discounted intrafamily transfers to reduce taxes and put value into other generations
- Dropping down to an LLC from a corporate structure to begin transitioning the business to new owners
There’s a dramatic difference in the number of tax-savings opportunities available to owners who start planning for a sale five years in advance instead of immediately beforehand, which is why long-term planning is key to a successful sale. The tools outlined in this article provide a starting point for owners who are beginning to determine what they can do to lower their sales tax.
But the first step in developing a long-term plan isn’t to evaluate tax-savings options—it’s to establish goals and a subsequent timeline. Once these goals have been decided, the appropriate tools can help owners achieve them.
Sid Tobiason, a partner with Moss Adams, has practiced public accounting since 1978. He advises clients on federal income tax, estate tax, entity structure, the purchase and sale of businesses, ownership transition, and succession planning. He can be reached at (858) 627-1448 or firstname.lastname@example.org.
Lewis Fisher, senior manager, has practiced accounting since 2000. He specializes in assurance and consulting and has experience with all audit phases, including compliance testing, fieldwork, and report preparation. He can be reached at (949) 623-4169 or email@example.com.
Amy Stillwell, a senior manager with Moss Adams, works exclusively with dealership owners and closely held businesses on federal and state income tax, estate planning, and large dealership transactions. She can be reached at (858) 627-1410 or firstname.lastname@example.org.