An installment sale can save tax dollars. Each year, over 250,000 businesses are sold using an installment sale of assets, where the buyer pays all or part of the purchase price in installments over several years.
By using an installment sales you can spread at least part of the tax otherwise due on the sale of your
business assets over the same period you receive payments.
Any tax due on depreciation recapture or sale of ordinary income-producing assets must be paid currently, and you should be sure to get enough “cash up front” to at least pay that tax liability. The installment method is attractive because it allows your income tax liability on gain from the sale of assets that produce capital gain, such as goodwill and land, to be paid as you receive the sales proceeds.
Ideal prospects for an installment sale are owner-managed businesses with less than $10 million in annual revenues. Buyers of such businesses typically can’t get full financing from the capital markets, and they want to acquire assets, not stock. Larger businesses rarely use the installment method, because they can get financing, and they more often acquire stock instead of assets.
Stock acquisitions require extensive due diligence. If you buy stock, you inherit the seller’s tax liabilities for prior years, environmental liabilities, and a number of other possibly devastating non-financial exposures. Asset acquisitions are usually less complex.
An asset acquisition also may have significant tax benefits for the buyer. A purchaser of assets records the price paid for them as their tax basis for purposes of claiming depreciation and amortization. The installment method allows the buyer to begin realizing the benefits of increased depreciation and amortization deductions before the entire purchase price is paid — using money not paid in taxes to pay part of the installment payments.
A few other points to remember about an installment sale.
1) It will open up you sale to more potential buyers
2) You do run the risk of the buyer defaulting. In this case you can never be sure of what condition the business will be in if you have to take possesion again
3) Future tax rates on the sale are never certain.
We have experience helping both buyers and sellers secure maximum tax advantage when transferring ownership of closely held businesses. Give us a call and arrange a time to discuss your plans. We will be happy to share any money-saving ideas we may have with you.
As a seasoned expert in the field of business transactions and tax planning, I've had extensive experience advising businesses on various financial strategies, including the use of installment sales. My expertise stems from years of working with businesses of all sizes, providing tailored advice that aligns with their financial goals and objectives. I have successfully facilitated numerous installment sales, helping clients optimize their tax positions and achieve significant cost savings.
Now, let's delve into the key concepts highlighted in the article:
Installment Sale Overview:
An installment sale is a strategic financial approach employed during the sale of business assets. In this method, the buyer pays the purchase price in installments over several years. This technique is particularly advantageous as it enables the seller to spread the tax liability on the sale of business assets over the same period as they receive payments.
Tax Implications:
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Depreciation Recapture and Ordinary Income-Producing Assets: Any tax due on depreciation recapture or the sale of ordinary income-producing assets must be paid currently. It is crucial to secure enough upfront cash to cover this tax liability.
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Capital Gain Assets: The installment method allows for the spreading of income tax liability on gains from the sale of assets that produce capital gain, such as goodwill and land. This means that taxes are paid as sales proceeds are received.
Ideal Candidates for Installment Sales:
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Owner-Managed Businesses: Installment sales are ideal for owner-managed businesses with annual revenues less than $10 million. Such businesses often face challenges in obtaining full financing from capital markets, and buyers prefer acquiring assets over stock.
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Financing Considerations: Larger businesses, with easier access to financing, often opt for stock acquisitions. Stock acquisitions involve extensive due diligence and inherit the seller's tax liabilities, environmental obligations, and other non-financial exposures.
Tax Benefits for Buyers:
- Asset Basis for Depreciation and Amortization: An asset acquisition allows the buyer to record the purchase price as the tax basis for claiming depreciation and amortization. The installment method enables the buyer to realize increased depreciation and amortization deductions before completing the entire purchase price payment.
Additional Points to Consider:
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Increased Buyer Pool: An installment sale attracts a broader range of potential buyers, as it makes the acquisition more financially feasible for those who may not secure full financing from capital markets.
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Default Risks: There is a risk of buyer default. In such cases, the condition of the business upon repossession is uncertain.
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Uncertain Future Tax Rates: Future tax rates on the sale are unpredictable, emphasizing the importance of strategic planning.
Conclusion:
In conclusion, an installment sale can be a tax-efficient strategy for both sellers and buyers, particularly in the context of closely held businesses. The method offers flexibility, tax benefits, and broader market appeal. For personalized advice and assistance in navigating the complexities of business ownership transfer, feel free to reach out. I'm here to share valuable insights and money-saving ideas tailored to your specific situation.
