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Tax Prep for Your Exit, with Richard Ehrlich

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Tax Prep for Your Exit, with Richard Ehrlich

Selling a business is exciting, especially if you can maximize its value. The common problem a business owner faces is the tax cut on the gains from the sale which can quickly reduce the proceeds from the sale of the business. However, this should not be a cause of worry because, with careful tax planning, tax liabilities can be legally reduced.

Exit Planning

Exit planning involves having strategic plans in place when you transition out of your business either because of a sale, retirement, or in some cases, due to expatriation. This process can significantly reduce the risks, challenges, interference, or even taxes.

The tax exit strategies are in place for the owners to meet their set financial, personal, and business goals as they transition and include these key components:

  • Get a business valuation from experts. 
  • Establish succession planning. 
  • Prepare the following: tax planning, financial planning, and estate planning
  • Have a contingency plan. 
  • Choose the perfect time to exit your business.

Tax Preparation Before Expatriation

Some citizens of the United States who decide to give up their green card status are subject to an exit tax or an expatriation tax. Not all who renounced their US citizenship, however, are subject to the expatriation tax. There are certain threshold or exit tax rules to meet:

  • Net Worth – should be $2 Million or more
  • Annual Net Income Taxaverage annual net income for 5 years before the expatriation year should be $178,000 in 2022 (adjusted for inflation)
  • Tax compliance – 5 years before the expatriation year, expatriates fail to certify that he or she is compliant with all federal tax obligations.

There is a $767,000 capital gains exemption for a covered expatriate. Anything beyond that is going to be charged an exit tax which is based on the below calculation:

  1. Compute the FMV (Fair Market Value) or deemed sale of the worldwide assets – that means including the assets in a foreign country
  2. Compute the total gain or loss from the deemed sale.
  3. Deduct the $767,000 exemption.
  4. Compute the tax liability if there is an amount over the $767,000 exception.
     

It is important to get the help of tax professionals to avoid potential issues during the process of expatriation and settlement of any exit tax obligations if there are any.

Business Succession & Its Importance

Succession planning is important even if you do not have any plans for an Exit yet. A lot of it has to do with protecting the stakeholders of the company and ensuring business continuity. But more importantly, this is an efficient exit strategy

Among its other benefits are the following: 

  • Enhance the company’s market value.
  • Protect the stakeholders of the company, especially the employees. 
  • Reduce tax liabilities arising from estate taxes, transfer of ownership, and other tax obligations resulting from succession. 
  • Increase its sellability. Succession planning attracts potential buyers and signals the readiness of the business for acquisition. 

Entrepreneurship and Benefits of Tax Planning for Exit

An entrepreneur’s focus is not just on running a profitable business but also on working on scalability and making an exit strategy for the eventual exit in the near or far future. Part of creating an exit plan is outlining an effective tax plan.

Outlined below are the key benefits that entrepreneurs will get for having exit planning tax strategies in place:

  • Business value and financial gains are maximized. 
  • Taxes such as capital gains, estate, and gift taxes are reduced. 
  • Tax-deferred accounts/tax deferrals can postpone paying the taxes later or decrease the tax payable. 
  • Change in ownership structure such as into an S-Corp or LLC before the exit to save on taxes. C-Corp businesses may be subject to double taxation. 
  • Entrepreneurs who access their retirement benefits before they exit ensure that they have access to those benefits no matter what the outcome of the exit is. 
  • A tax-efficient planning smoothens the process of transitioning from one owner to another.
     

Entrepreneurship is more than just working for the survival of the business – it is also about planning ahead to ensure the continuity of the business while increasing its potential business value.

Ehrlich Tax Planning

Richard Ehrlich provides a tax efficient exit strategy for entrepreneurs who have already decided to move out of their business. These strategies are mainly focused on managing their tax obligations to minimize the tax liabilities at the time of exit or transition. 

Being tax compliant is important even during exit. Using the tax exit strategies provided by Richard Ehrlich can help maximize the proceeds from the exit by careful planning that includes a combination of choosing the right time to exit, deal structuring, and tax incentives leveraging. 

By applying tax-efficient strategies, the business achieves long-term financial security and avoids potential tax evasion problems. So, even when you have decided to seek the help of experts who can help you optimize the business operations to increase the valuation of your business, do not skip the part where you have to hire tax professionals who can help you maximize the value of the business without reducing the proceeds from the sale due to taxes. 

Small Business Taxes, Tax Planning Tips

It is not just big businesses that have to deal with the tax implications during an exit during the tax year. If anything, small businesses also deal with complicated taxes depending on how the business is structured and where it is located. 

To avoid tax pitfalls, small businesses also need to make a tax plan to reduce their tax liabilities, avoid hefty fines and penalties, and stay compliant throughout the life of the business. 

Here are some tips that small business owners can take: 

  • Decide what the right business structure is for the firm. For efficient tax planning, changing the structure to a C-Corp or LLC can provide tax benefits.
     
  • Know what the deductible expenses are because they reduce the taxable income. Deductible expenses are the following: rent, utilities, office supplies, equipment, staff salaries and their benefits, marketing expenses, advertising costs, and vehicle expenses.
     
  • Take advantage of maximizing retirement contributions, depreciation, deductions on health insurance, and tax credits.
     
  • Get the help of tax experts.

Financial Planning For Business Owners

Running your own business is not an easy task but it is imperative that as business owners, you have a long-term financial plan for the success of your business and ensure its sustainability. This financial plan, however, is not just limited to the business but also includes making plans for your personal finances.

  1. Cash is king. Business owners must ensure that there is enough cash for the operations of the business and for it to sustain its daily operations.
     
  2. Your business and personal finances are two separate legal entities. This means that the revenues and expenses should be kept separate.
     
  3. Get the needed insurance policies for the firm to protect it from risks that may lead to potential financial losses.
     
  4. Have a plan in place – retirement, succession, tax, investment, estate, and contingency.
     
  5. Know how to manage debt.
     

Being on top of your financial plan can help you manage all the financial aspects of your life successfully.

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