If you live in a high-tax state, you are probably familiar with the concept of PTE, where you pay your state income taxes at the business level to get full state tax deductibility from federal income taxes. The same benefit applies when you sell your business. On an asset sale, you can retain proceeds in your business to pay state income taxes. On a complete business sale, you might consider setting up a holding company before negotiating to sell your business so that you have a leftover entity post-sale to pay the state income taxes and create the full deductibility from federal taxes.
Here’s the Approach:
1. Example: If you retain sales proceeds of $2 million in a pass-through entity, you benefit from the pass-through taxation election where your entire state income is deducted from your federal income taxes, instead of the $10,000 limit if you had paid the state income taxes on your personal tax return.
2. Tax Impact: If the pass-through income is taxed at a 13% effective rate in California, using PTE could mean a 13% tax savings or about $52,000 on $2 million of gains.
Conclusion
Selling your business presents an opportunity to implement strategic tax planning to maximize your financial outcome. By donating to a DAF, establishing a cash balance plan, and using the PTE benefit, you can realize substantial tax savings and enhance your overall financial position.
For tailored advice and assistance with these strategies, consult with experienced tax professionals and financial advisors to ensure you make the most of your sale.
How to Learn More
Attend Charles Goldblum’s Workshop “Make the Most of Your Agency Sale!” at the 2024 American Agents Alliance and Convention Expo on 9/19 & 9/21
About the Author: Charles Goldblum, CFA, CFP®
Chuck advises individuals, business owners, and business sellers on tax planning, estate planning, budgeting, investing, and private company stock. As a planner and investor, he helps clients maximize outcomes and plan for the future they desire. At the time of founding Hurley Capital, LLC in 2003, Chuck worked as an adviser to Emancipation Capital, a value-oriented hedge fund. Previously, Chuck researched enterprise software companies as an Equity Analyst at SG Cowen Securities, CIBC World Markets, and First Union Securities. Prior to that, Chuck was a metals trader for Trafigura AG, and Glencore AG in New York, Moscow, and Switzerland.
