We recently received this question from a client:
Q: Just wanted to give you a heads up. If all goes according to plan, we will be signing the sale agreement this week for my office. Is there any way to reduce the tax implications of the transaction?
A: Here are 5 steps to take to minimize your taxes when selling your practice:
- Confirm that all of the payments you receive will be considered Capital Gains, and none will be Ordinary Income. The long-term Capital Gains term rate is half of the Ordinary Income rates.
- Make sure you will max out the 401k salary deferrals for $30k (since you are over the age of 50) prior to the sale date in case you may not be eligible to participate in the 401k plan of the successor company until next year.
- Speak with your investment advisors and have them sell any stocks and mutual funds you are holding that went down in value. Losses realized prior to December 31st from your investments held in taxable accounts will offset the capital gain on the sale. Make sure they don’t rebuy the same investments within 30 days of the sale or the losses will be disallowed under the Wash Sale rules.
- Also speak with your investment advisors about rolling some of the gain from the sale into an Opportunity Zone partnership. Doing so will allow you to defer paying taxes on the portion of the gain used to purchase an interest in an OZ. Please note that Opportunity Zones are investments made in distressed communities in the US, so they are inherently risky investments that also aren’t very liquid; which means that money may be tied up in that investment for a while. For more information, check out: https://schwartzaccountants.com/2019/11/defer-and-possibly-reduce-taxes-on-capital-gains-by-investing-in-a-qualified-opportunity-fund/
- And consider making a large contribution to your Donor Advised Fund the year you have a substantial gain. For more information, check out: https://schwartzaccountants.com/2020/11/using-donor-advised-funds-for-charitable-giving-12-31-deadline/ and https://schwartzaccountants.com/2018/04/tax-benefits-of-establishing-a-donor-advised-fund-daf/.