Your partner, Uncle Sam, through federal income taxes and his State and Local Tax friends (lovingly called “Tax Partners”) are happy to get their share of your business profits (and payroll income) right now. If you are like most business owners, you are focusing on reducing your contributions legally through strategic tax planning and strategic planning to your Tax Partners this year. If you’re like some amazing business owners, you’re doing your best to see how you’ll reduce your payments to your Tax Partners over the course of your life and the life of your business through strategic exit planning and strategic tax planning.
Common reasons given for the lack of strategic tax planning and strategic exit planning are, “we need to make too many assumptions and guesses”, “everything keeps changing”, and often, “we are too busy and never do it”.
Therefore business owners who will never run their business with legacy software, put their crew on vintage trucks, or run inefficient assembly lines often have old company selection and tax consequences that could have been avoided because of strategic decisions made 20 years ago. ago or so. (Just because you can’t see it doesn’t mean it doesn’t exist.)
The most recent example we saw was a carefully executed supplier of construction safety equipment. When the business was formed 25 years ago, the owners opted for the C Corporation tax treatment. At the time there were many strategic tax benefits to that treatment and the election was the right thing to do. Yet somewhere between 12 and 15 years ago those benefits were lost but no one ever looked forward to a long-term strategic tax plan and a strategic exit plan to foresee negative consequences.
The business had an estimated sales value of approximately $1,500,000 and due to the size and nature of the business buyers insisted that the sale be structured as a sale of assets. This scenario means the owner’s Tax Partner will receive approximately $300,000 ADDITIONAL from this transaction due to the long election. This is a huge price to pay for missing a timely change in tax status.
There are many pitfalls and other pitfalls small business owners can catch. Because the owner understands day-to-day operations, traps tend to jump out and bite at times that require major changes and transitions. Assembling the right team and asking the right questions regularly starting many years in advance will help avoid this pitfall and produce superior results.
While long-term transitions, taxes, and exit strategy planning and analysis seem expensive in the short term, they are cheap in the long run. (Yeah, I mean cheap.) In the end, it’s what you keep that matters. Save more with planning.
Note: This is not tax advice but an example case study based on a similar situation. You are advised to seek professional help for your specific situation before taking any action. No part of this is intended to be used to evade tax penalties, or to promote, market or recommend any tax-related actions or activities to others.
