Not Just for Retail: Selling Your Business by Installments Brings Tax Advantages

After years of building and growing your company, you may be ready to move on to your next adventure. Do you know how to get the greatest return from selling your business? The return to you depends on more than the price. Minimizing the tax you pay puts more dollars in your pocket — and an installment sale is one way to do that.

Defer — even reduce — tax liability on the sale

An installment sale spreads payments over multiple years, rather than in one lump sum. This means that your gain is also spread over several years.

Installment sales usually defer taxes, because taxes come due when you receive payments. Such tax deferral could be especially beneficial if it allows you to stay under the income thresholds that trigger the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.

For 2018, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. The 20% long-term capital gains rate kicks in when 2018 taxable income exceeds $425,800 for singles, $452,400 for heads of households and $479,000 for joint filers (half that for separate filers).

Potential negotiation tactic

Structuring a sale with installments might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer who lacks the cash to pay a lump sum.

Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.

Tax risks

An installment sale isn’t without tax risk for sellers. For example, depreciation recapture must be reported as gain in the year of sale, no matter how much cash you receive. So you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax. If depreciation recapture is an issue, be sure you have cash from another source to pay the tax.

It’s also important to keep in mind that, if tax rates increase, the overall tax could end up being more. With tax rates currently quite low historically, there might be a greater chance that they could rise in the future. Weigh this risk carefully against the potential benefits of an installment sale.

Pluses and minuses

As you can see, installment sales have both pluses and minuses. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us.

© 2018