Profit Preservation: Tax-Deferred Strategies for Selling Your Business
Admin • March 8, 2024
You’ve built a thriving business and poured your heart and soul into it, and now it’s time to sell and reap the rewards. Congratulations! That’s a monumental step, not just in terms of the immediate financial windfall but also for your long-term financial health. It’s an exhilarating, albeit slightly nerve-wracking, phase.
But before you pop the champagne and sail off into the sunset, let’s talk strategy, specifically tax strategy. Yes, I know “tax” isn’t the most thrilling word in our vocabulary, but stick with me because Uncle Sam has his eye on a piece of the pie.
Selling a business can trigger a significant tax bill, leaving you feeling like you just worked hard for someone else. Understanding and leveraging tax-deferred opportunities can significantly impact how much of that sale you get to keep and grow over time.
What Does Tax-Deferred Mean?
Tax-deferred means you can delay paying taxes on investments and their earnings until you withdraw the money. This allows your money to grow tax-free, potentially leading to significant savings. Often, when money is withdrawn during retirement, you will be in a lower tax bracket.
Here’s an example: Imagine you sell your business for $1 million, resulting in a $500,000 capital gain. If you were to pay taxes on that amount right away, it could leave a hefty dent in your pocket. But by utilizing a tax-deferred strategy, you can hold onto that money and invest it, allowing it to grow tax-free until you withdraw it later. The longer you leave it untouched, the more it can compound, leaving you with a much larger sum.
Tax Strategies for the Savvy Seller
There are several tax-deferred opportunities available that can help you minimize your tax burden. Let’s explore some options you might want to consider.
1. Seller Financing
Have you ever thought about being the bank? In seller financing, you extend credit to the buyer to purchase the business. The buyer pays you back over time with interest. The catch? You don’t get all your money upfront. Still, it can spread the tax burden over several years, potentially keeping you in a lower tax bracket and reducing the immediate tax hit.
Pros:
- Spreading sale proceeds over several years minimizes annual capital gains taxes for tax benefits.
- Seller financing can speed up the closing process since there’s no waiting on the bank’s loan approval.
- Offering seller financing widens the potential buyer pool.
- Sellers may command a higher sales price because they’re offering financing.
- Seller financing generates consistent interest income for sellers.
Cons:
- One of the most significant risks for sellers is the buyer defaulting on the loan.
- Deferred full payment to sellers.
- Crafting a seller financing agreement requires legal assistance to ensure the contract protects both parties. This can add to the transaction’s costs and time.
- Sellers manage loans and address payment issues.
2. Installment Sales
Similar to seller financing , installment sales allow you to defer taxes by receiving the proceeds over time. You only pay taxes on the portion of the gain you receive each year. This can be a great way to manage your tax liability and keep more money working for you over the sale period.
Pros:
- Pay tax only on received installment profits, deferring tax liability.
- Installment sales enhance buyer accessibility beyond traditional financing.
- Earn interest on financed amounts for additional income.
Cons:
- Risk of buyer loan default.
- Delayed full payment of sale proceeds.
- Potential for lower future income if interest rates rise.
- Possible decline in property value over time, complicating resale after default.
3. Qualified Opportunity Funds (QOFs)
This program was established by the federal government in 2017 and designed to spur economic development in specific areas. If you reinvest your capital gains into a QOF operating in a designated Qualified Opportunity Zone (QOZ), you can defer paying taxes on those gains until you sell your investment, or until December 31, 2026 — whichever comes first.
You must reinvest your capital gains within six months of selling your business. If you hold the investment for at least five years, you can exclude a portion of your original capital gains from taxation. If the investment is held for at least ten years, any capital gains from the future sale of the investment are returned to you tax-free.
Pros:
- Defer taxes on QOF gains until Dec 31, 2026, or upon sale/exchange.
- 10% gain exclusion for QOFs held over 5 years; 15% for over 7 years.
- After 10 years, QOF investments can grow tax-free.
- QOF investments boost distressed areas with new jobs and development.
- Opportunity to make a positive impact in at-need communities.
Cons:
- As with any investment, there’s no guarantee of a return, and investing in distressed areas may carry higher risks.
- There are strict regulations to qualify for the tax benefits, including how and when funds are invested and managed.
4. Real Estate 1031 Exchange
If your business includes real estate, a 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds from the sale of your property into the purchase of another property. Also known as a “like-kind” exchange, the IRS lets you sell one property and reinvest the proceeds in another similar property while deferring taxes on your gain.
With careful maneuvering, real estate investors can use 1031 exchanges to keep deferring taxes indefinitely through strategic property swapping.
Pros:
- Defer capital gains taxes on the sale.
- By deferring taxes, investors can potentially acquire larger or more valuable properties, allowing their portfolio to grow.
- Properties exchanged through 1031 may be inherited with a stepped-up basis, negating capital gains tax.
Cons:
- The rules governing 1031 exchanges are complex; failing to adhere to them can result in a significant tax liability.
- Strict timing pressures quick decisions, risking less favorable choices.
- Not all real estate transactions qualify for a 1031 exchange.
5. Charitable Remainder Trust (CRT)
Feeling philanthropic? A CRT allows you to contribute a portion of your business sale proceeds to a trust, which then pays you (or another beneficiary) a stream of income for a term of years or for life. After the term ends, the remainder goes to your chosen charity. This strategy can offer immediate tax deductions and reduce estate taxes while supporting a cause close to your heart.
For example, let’s say you sold your business for $5 million and contributed $2 million in proceeds to a CRT. The CRT could then pay you a set percentage of $2 million yearly, say 5%, equaling $100,000 annually. After your death, the charity of your choice would receive the remaining assets in the CRT.
Pros:
- Claim an immediate tax deduction in the year you set up the trust and transfer assets into it.
- If the CRT is funded with appreciated assets, assets within the trust can be sold without incurring capital gains tax at the time of the sale. This allows the full value of the assets to be reinvested by the trust, potentially increasing the income generated for the beneficiaries.
- CRTs provide an income stream for the beneficiaries.
- Beyond the financial benefits, you can support causes and organizations important to you.
Cons:
- CRTs are irrevocable; beneficiaries or terms of the trust cannot be changed.
- Setting up and managing a CRT can be complex, requiring legal and financial expertise.
- Income received depends on the trust’s investment performance. Poor investment performance can reduce the income stream and the ultimate charitable donation.
Let Five Pine Wealth Help You With Tax-Deferral Strategies
Smart tax planning is crucial, and every situation is unique. It’s essential to carefully evaluate your options and seek professional advice before making any decisions.
Remember, navigating the complexities of tax law can be tricky. Five Pine Wealth Management has experienced advisors who can help you determine the best tax-deferral opportunities for your situation. To schedule a meeting, send an email or give us a call at 877.333.1015.
Selling your business is a considerable achievement and the start of a new chapter. Celebrate your success, explore your options, and make informed decisions to maximize the rewards of your entrepreneurial journey.
The post Profit Preservation: Tax-Deferred Strategies for Selling Your Business appeared first on Five Pine Wealth Management.
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We’re all feeling it these days: the underlying feeling of uncertainty about what lies ahead. Each day, we see headlines about inflation, Social Security’s future, or market swings. Unsurprisingly, Gallup tells us that the top three American fears have to do with money: the economy, availability/affordability of healthcare, and inflation. If you’re in your 50s and 60s, these concerns probably hit even closer to home. You’re not just thinking about the economy in general terms. You’re wondering how it will affect your specific retirement plans. Your mind likely turns to: Increasing healthcare costs – can you absorb unexpected costs on a fixed income? Inflation and market volatility – will the value of the dollar diminish your retirement savings? Social Security uncertainty – will it exist when you retire? Having enough saved – will your retirement budget hold up when the time comes? About 1 in 4 Americans over 50 are delaying retirement , and it’s not hard to understand why. With thoughtful planning and the right strategies, you can build confidence in your ability to maintain your lifestyle on a fixed income, regardless of what economic curveballs come your way. 5 Key Strategies to Prepare for Living on a Fixed Income Uncertainty doesn’t have to derail your retirement plans. By addressing these five critical areas, you can build a foundation that allows you to enjoy the retirement you’ve worked toward. 1. Review (And Potentially Adjust) Your Retirement Timeline One of the most powerful tools you have is flexibility with your retirement timeline. While certain ages qualify you for benefits or withdrawals from certain accounts, there’s no concrete age you have to retire at. Traditional retirement at 62 or 65 might not make sense for your unique situation; you should feel free to alter your timeline to make sense for you and your family. Consider Your Social Security Strategy Your Social Security benefits increase each year you delay claiming them beyond your full retirement age, up until age 70. For many people, this creates a meaningful boost to their guaranteed monthly income. If you can afford to wait, this strategy alone can significantly strengthen your fixed-income foundation. Explore Phased Retirement Options Rather than going from full-time work to complete retirement overnight, consider a gradual or phased transition. Many of our clients find success with: Part-time consulting in their field of expertise Freelance work that leverages their skills Small business ventures they've always wanted to try Investment properties that generate passive income This approach not only eases the financial transition but often provides a sense of purpose and engagement during early retirement. 2. Fine-Tune Your Investment Mix and Retirement Income Strategy Adjusting your portfolio is an ongoing responsibility, not a one-time task before retirement. Continue to revisit and rebalance as a proactive part of your retirement plan. Equally important is creating multiple income streams to reduce your reliance on any single source. Diversify Your Retirement Income Sources Think of building several income bridges instead of relying on one massive one. Your retirement income might come from Social Security, traditional retirement accounts (401(k), IRA), Roth accounts for tax-free withdrawals, and taxable investment accounts for flexibility. Each serves a different purpose in your overall strategy. Is Your Portfolio Inflation-Resistant? Cash can feel safe, but inflation quietly erodes its purchasing power over time. If you want an honest look at the hard numbers of inflation, see the Bureau of Labor Statistics CPI Inflation Calculator . For example, we see that $1,000,000 in 2015 has the buying power of $1,380,194 in 2025. You would need an extra (almost) $380,000 to make up for inflation. Inflation is a reality of the economy that everyone deals with, but your investment strategies can mitigate its impact on your net worth. Consider allocating a portion of your portfolio to assets that historically perform well during inflationary periods. Don’t Abandon Growth Too Soon If you're retiring in your early 60s, you could have 20-30 years ahead of you. Being overly conservative with your investments might feel safer in the short term, but it could leave you struggling to maintain your lifestyle later. A balanced approach that includes growth-oriented investments can help ensure your money lasts as long as you do. 3. Reduce Outstanding Debts The Federal Reserve’s most recent Survey of Consumer Finances reports that the average older adult (ages 65 and up) carries between $95,000 and $172,000 in debt. 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Plan for Healthcare Costs and Insurance Transitions Healthcare expenses are frequently retirees' most underestimated cost. Add in Medicare's maze of coverage options, and it's no wonder many retirees feel unprepared. Planning for these expenses and understanding your options before you need them can prevent costly surprises that strain your fixed income. Understand Your Medicare Options If you're 65 or older: Enroll in Medicare during your Initial Enrollment Period (IEP), which begins 3 months before your 65th birthday and extends 3 months after Consider supplemental coverage options: Medigap (if you choose Original Medicare Parts A and B) Medicare Advantage (Part C) as an alternative to Original Medicare Prescription Drug Coverage (Part D), if not included in your plan If you’re under 65 and retiring, consider: COBRA coverage from your employer allows you to keep your current plan for up to 18 months, but you'll pay the full premium plus administrative fees (typically $400-$700 per person monthly) Your spouse's employer plan (if available and you're eligible) An Affordable Care Act (ACA) marketplace plan Prepare for the end of employer-sponsored insurance coverage about a year in advance to avoid lapses in coverage. Build a Healthcare Reserve According to the 2025 Fidelity Retiree Health Care Cost Estimate , a 65-year-old individual may require approximately $172,500 in after-tax savings to cover health care expenses in retirement. Consider establishing a separate savings account specifically for medical expenses. Health Savings Accounts (HSAs), if you're eligible, offer triple tax advantages and can be particularly valuable for retirement healthcare planning. 5. Create a Flexible Retirement Budget It’s wise to reevaluate where your money is going every month so you can enjoy once-in-a-lifetime retirement opportunities fully. This, combined with an emergency fund, helps avoid lifestyle creep and the stress of unexpected expenses. Plan for the “Retirement Smile” Retirement spending tends to move in a “U” shape: higher spending in early retirement, less in the middle, and back up again towards the end. While your bucket list trips and experiences are significant expenses, they’re often one-and-done. Most people do these things early on in retirement and slow down into a more predictable financial rhythm. Towards the end of retirement, costs often increase again to cover long-term care needs. Organize Your Budget Into Categories Consider dividing your retirement expenses into essential costs (housing, utilities, healthcare), lifestyle expenses (travel, dining, hobbies), and discretionary spending (gifts, major purchases). Cover your essentials with your most reliable income sources like Social Security, while funding lifestyle expenses through portfolio withdrawals that can adjust during market downturns. How Can You Reduce Your Future Cost-of-Living? Consider ways you can capitalize on your existing assets to better position yourself for the future. If you’ve built significant home equity, downsizing or moving to a more affordable city may be a great option, as you’ll benefit from liquidity and reduced costs. Rely on A Trusted Fiduciary Financial Planner If you’re feeling anxious about the future, know this: you’re not stuck doing it on your own. With the help of a fiduciary financial planner, you can not only see if your plan holds up against inflation and economic uncertainties, but they will: Prioritize tax-efficient retirement withdrawal strategies Strategize Required Minimum Distributions (RMDs) Create a sustainable withdrawal strategy The best thing you can do for a healthy retirement is to leverage the experts. At Five Pine Wealth Management , we create comprehensive financial plans that align with your financial goals and personal values. If you'd like to discuss how these strategies might apply to your specific situation, we're here to help. Email us at info@fivepinewealth.com or call 877.333.1015 to schedule a conversation about your retirement planning needs.
Your 40s arrive with a unique mix of clarity and urgency. You've likely figured out what you want from life, but suddenly retirement no longer feels like a distant concept. If you're looking at your financial situation and feeling behind, you're not alone. Many people in their 40s experience this same wake-up call. The good news is that this decade offers some of the most powerful opportunities to accelerate your wealth-building journey. Think of your 40s as your financial prime time. You're earning more than you ever have, you understand money better than in your 20s and 30s, and you still have 20-25 years to let compound growth work its magic. Instead of dwelling on what you should have done differently, let's focus on what you can do right now to make this decade count. The Reality Check: Where You Stand vs. Where You Want to Be Before exploring strategies, let's acknowledge the elephant in the room. Many financial experts recommend saving three times your annual salary by age 40. If you're reading this and thinking, "I'm nowhere near that," take a deep breath. Life happens. Maybe you started your career later, switched fields, dealt with medical expenses, helped family members, or simply prioritized other goals during your 30s. The key is to start from where you are today, not where you think you should be. Your 40s bring unique advantages: higher earning potential, greater financial discipline, and often more stable life circumstances. Many successful investors didn't hit their stride until their 40s or later. You're not behind; you're just getting started on a more intentional path. Retirement Savings Strategies That Work in Your 40s Your retirement savings strategy in your 40s should differ from someone in their 20s or 30s. You have less time but more resources, which means you need to be both aggressive and smart about your approach. First, maximize your employer's 401(k) match if you haven't already. This is free money, and missing out on it is like leaving cash on the table. Additionally, consider increasing your contribution rate by 1-2% each year, or whenever you receive a raise. This gradual approach makes the adjustment less painful while significantly boosting your long-term savings. Roth conversions become particularly powerful in your 40s. If you expect to be in a higher tax bracket in retirement or if you want to leave tax-free money to heirs, converting some traditional IRA or 401(k) funds to Roth accounts can be a smart move. The key is to do this strategically, perhaps in years when your income is temporarily lower or when you can manage the tax impact. Don't overlook the power of diversification beyond your 401(k). A taxable investment account gives you flexibility and access to your money before age 59½ without penalties. This can be crucial for achieving early retirement goals or covering major expenses that may arise before the traditional retirement age. Catch-Up Retirement Contributions: Start the Habit Now Once you reach 50, you can make catch-up contributions to your retirement accounts, which significantly increases your savings potential. For 2025, this means an additional $7,500 in 401(k) contributions (bringing your total to $31,000). However, you don't have to wait until 50 to think like someone making catch-up contributions. Start now by treating your savings rate as if you're already eligible for these higher limits. If you can save an extra $600 per month ($7,200 annually) starting at 45, you'll have built the habit by the time you're actually eligible for catch-up contributions. Retirement Milestones by Age 40: A New Perspective Traditional retirement milestones can be discouraging if you're starting later or if life hasn’t gone as planned. Instead of focusing on arbitrary multiples of your salary, consider these more practical benchmarks for your 40s: The Emergency Fund Foundation : Before aggressively pursuing retirement savings, ensure you have a solid emergency fund in place. This prevents you from having to tap retirement accounts during tough times. Aim for 3-6 months of expenses, adjusted for your specific situation. The Debt Freedom Focus : High-interest debt can quickly derail retirement plans. If you're carrying credit card debt or other high-interest obligations, addressing these might be more valuable than maximizing retirement contributions beyond your employer match. The Income Replacement Goal : Rather than focusing on net worth multiples, think about what percentage of your current income you're on track to replace in retirement. A good target is 70-80% of your pre-retirement income, but this depends on your lifestyle and retirement plans. The Flexibility Buffer : Your 40s are a great time to build financial flexibility. This means having investments outside of retirement accounts that you can access without penalties, creating multiple income streams, and maintaining career skills that keep you marketable. Insurance: Life and disability insurance coverage should reflect your current income and family needs. Estate Planning : A basic will, power of attorney, and healthcare directive should be in place. Making Your Peak Earning Years Count Your 40s often represent your peak earning years, and how you manage this increased income will significantly impact your financial future. The temptation to inflate your lifestyle with every raise is real, but this decade calls for more strategic thinking. Consider implementing a "pay yourself first" approach where you immediately redirect any income increases to savings and investments. If you get a $5,000 raise, automatically increase your 401(k) contribution by $3,000 and your taxable investment account by $2,000. You'll barely notice the difference in your take-home pay, but you will thank yourself in the future. This is also the time to think seriously about additional income streams. Whether it's consulting in your field, starting a side business, or investing in rental real estate, diversifying your income sources provides security and potential for acceleration. Building Wealth Beyond Retirement Accounts While retirement accounts are crucial, they shouldn't be your only wealth-building tool. Your 40s are an excellent time to diversify your investment approach and build wealth that's accessible before traditional retirement age. Consider opening a taxable investment account if you haven't already done so. This provides flexibility and liquidity while still offering growth potential. Focus on tax-efficient investments, such as index funds, and consider holding dividend-paying stocks or REITs for their income potential. Real estate can be particularly powerful in your 40s. Whether it's paying off your primary residence early, investing in rental properties, or exploring REITs, real estate adds diversification and potential inflation protection to your portfolio. Don’t Forget the “You” Factor We’d be remiss not to mention this: life in your 40s is busy. You might be managing aging parents, teenagers, or a toddler (or all three). You may be helping your partner through a career change or navigating one yourself. It’s a lot. Which is precisely why intentional financial planning matters now more than ever. You don’t need to do it perfectly. You just need a plan that’s rooted in your real life — your values, your vision, and your goals. A good financial advisor can help you prioritize, simplify, and clarify the next best steps, even if you feel like you’ve fallen behind. Ready to Create Your Personal Financial Strategy? Feeling overwhelmed by all the options and strategies available? You don't have to navigate this journey alone. At Five Pine Wealth Management , we specialize in helping individuals and families in their 40s and beyond create comprehensive financial plans that align with their goals and circumstances. Whether you're looking to maximize your retirement savings, explore catch-up strategies, or build a diversified investment portfolio, our team can help you develop a personalized approach tailored to your situation. We work with clients at various stages of their financial journey, from those just getting serious about retirement planning to those with substantial assets seeking to optimize their strategies. Don't let another year pass wondering if you're on the right track. Schedule a conversation with our team to discuss your financial goals and explore how we can help you make the most of your financial prime time.
