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Tax Planning & Business Succession

Tom Bayer

Sep 25 2019

3 min read

How to tax plan for business succession

We attended the Forbes Ag Summit in Indianapolis in September, and while Steve Forbes continues to advocate for a flat tax and tax simplification, tax codes continue to be complicated. These are the rules business owners must navigate as they position their business for transition.

As we approach the end of 2019, we want to highlight two provisions from the recent Tax Cuts and Jobs Act (TCJA) that can significantly impact what business owners might realize upon the sale of their business.

Reduction in Corporate Tax Rates

Federal corporate tax rates were reduced to 21%, and for a growing business that plans to reinvest profits, converting to a C Corporation may make sense. Some ideas include:

Finding capital to buy out a minority shareholder or invest in a new product line or add more employees

Reducing the overall tax rate: a way to redirect capital from tax expense to other strategic needs. This may be beneficial from a positioning standpoint as well. For example, if a business is currently formed as an S Corporation and is considering an ESOP, or, financial buyers such as private equity firms or family offices are likely to show interest in the business, entity type matters. This is not a decision that should be made without careful analysis of all relevant factors, including qualitative factors. The lower corporate tax rate has reopened this discussion, and is one which business owners should pay close attention.

Opportunity Zones

Part of our planning process for any business succession planning engagement includes evaluating the tax impact of the sale of a business. Business owners have a variety of options on how to use proceeds from the sale of their business, and the TCJA created a new option: any capital gain generated from the sale of the business could be reinvested in a Qualified Opportunity Zone (QOZ).

By investing the gain in a QOZ, business owners defer paying taxes on that gain until 2026, when taxes on the gain will become due. In addition, any QOZ investment held for 10 years can avoid any tax as any appreciation in that investment is not taxable.

Summary

Tax impact matters. Consider that the tax brackets for individual taxpayers range from 12% to 37% – a difference of 25%. The difference between the highest ordinary rates of 37% and the lowest capital gains rates of 15% is 22%.

Passthrough entities are taxed at the individual level, as taxable income is passed through to the individual shareholders or partners. For a C Corporation, the rate is 21% and for individuals, the highest rate is at 37%, a difference of 16%.

Consider the sale of a business with a taxable gain of $5 million. Does a difference of a tax rate of 25% or 22% make a significant difference? Absolutely.

Business succession planning is a good business strategy, regardless of your proximity to a planned exit.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author

Tom Bayer

Thomas E. Bayer, CPA, CExP, is the Market Expansion Leader for the Indianapolis region. He has experience providing a broad range of accounting, tax, and business advisory services to commercial clients across various industries and Sikich markets. Tom has specialized expertise in the areas of business succession planning, tax planning and compliance, and business advisory. Tom has specialized expertise in the areas of tax planning and compliance, business advisory services and business succession planning. He puts his business succession planning abilities and knowledge to work across the organization, serving clients in advisory services throughout the country. He is a Certified Public Accountant (CPA), a Certified Exit Planner (CExP) and is Certified in Strategic Performance Management (CSPM).